Lilys preference is represented by the utility function u(x, y)=100ln(x+1)+ y, where x is the number of pairs of rings she buys per week and y is the number of dollars per week she has left to spend on other things. We allow for the possibility that she buys fractional numbers of pairs of earrings per week. If she originally had an income of $150 per week and was paying a price of $2 per pair of earrings, then if the government impose a tax of $2 on earrings and passed on in full to consumers, compute the compensating variation and the equivalent variation of that tax imposition (measured in dollars per week)

Answer rating: 100% (QA)

To compute the compensating variation and the equivalent variation resulting from the tax imposition we need to compare the utility levels before and ... View the full answer