Compensating variation and equivalent variation

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Reference no: EM134046151

Question

Suppose a video game player has the following utility function: U(qA, qB) = ( √ qA + √ qB)2 where qA is the quantity of Axes used in the game and qB is the quantity of bombs. The video game player has $50 per month to allocate to the game. Initially the video game seller priced axes and bombs identically: PA = PB = $1. After several months, the game seller adjusts the prices to PA = $0.50 and PB = $2 since not enough people were buying axes and too many people were buying bombs. Find BOTH the compensating variation and equivalent variation for the video game player from the price change.

Reference no: EM134046151

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