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Calculate the compensating variation

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Reference no: EM131348043

Consider a consumer whose preferences can be represented by the utility function

u(x, y) = x + y

  1. Originally, px = 1, py = 2 and m = 1. What bundle does the consumer choose, and what is his utility from this bundle?
  2. The price of good x then rises to 3. What bundle does the consumer choose after the price change, and what is his utility from this bundle?
  3. Calculate the compensating variation. (Hint: at the new price ratio, what good will he spend his income on?)
  4. Calculate the equivalent variation.

Please find the attached file for any unclear data. 

Reference no: EM131348043

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