(b) You consume two goods, good x and good y. These goods sell at prices px = 1 and py = 1, respectively. Your preferences are represented 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 your utility? If px increases from $1 to $2; figure out the compensating variation (CV) associated with price change.

(c) If instead your utility is U(x; y) = ln(x) + y; figure out the compensating variation (CV) as px increases from $1 to $2:

(d) Are the compensating variations the same for both of the above utility functions? Explain your answer rigorously.

Answer rating: 100% (QA)

Solving for Consumption Bundle and Compensating Variation b Utility Function Ux y x lny Budget Constraint Your income is m 100 and prices are px 1 and ... View the full answer