Question: Utility describes a persons preferences. Suppose a persons utility function over two goods x and y is = 6 2 + . The budget describes

Utility describes a persons preferences. Suppose a persons utility function over two goods x and y is

= 6 2 + .

The budget describes how much a person can afford to buy. Suppose the same person has a budget of

16

and the price of x is

2

and the price of y is

1 .

Now, if the price of increases to

2,

the person will be worse off. What is the compensating variation of this individual? In other words, to bring her back to her original utility level, how much more income should she receive?

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