A consumer has the utility function U(X,Y) = min(2X,3Y). Initially the price of X is $3 (px=3) and the price of Y is $2 (py=2). Our consumer has an income of $195 (m=195).
Now assume that the price of Y rises from $2 to $3 (py' =3) while the price of X stays the same.
a) Calculate compensating variation.
b) Calculate equivalent variation.
c) Define and distinguish between compensating variation and equivalent variation in the context of your answers in part a and in part b.