(a) What is the compensating variation? What is the equivalentvariation? What is the diâ„erence between them?
(b) You consume two goods, good x and good y. These goods sellat prices px = 1 and py = 1, respectively. Your preferences arerepresented by the following utility function: U(x,y) = x+ln(y).You have an income of m = 100.
How many units of x and y will you buy and what will is yourutility? If px increases from $1 to $2; figure out the compensatingvariation (CV) associated with price change.
(c) If instead your utility is U(x,y) = ln(x) + y, figure outthe compensating variation (CV) as px increases from $1 to $2.
(d) Are the compensating variations the same for both of theabove utility functions? Explain your answer rigorously.
