Caroline Sierra loves to eat raspberry-apple cobblers, but will only do so if the raspberries and apples are used in the ratio of 3 ounces of raspberries to 2 ounces of apples. Assume that each cobbler uses exactly 3 ounces of raspberries and 2 ounces of apples. Each cobbler eaten yields 1 unit of utility, and the utility of cobblers is linear in the number eaten. Say the price of raspberries is $5 per ounce and the price of apples is $2 per ounce. It costs $190 to achieve a utility level of 10. Then a tax is placed on raspberries so that their price increases from $5 to $10 per ounce. What is the price-compensating variation?
A) $340
B) $150
C) $260

Question

Quizplus · Accepted Answer

The original cost of ingredients for one cobbler is $(3 	imes 5) + (2 	imes 2) = $15 + $4 = $19. To achieve a utility level of 10, the cost is 10 cobblers 	imes $19/cobbler = $190. After the tax, the cost of raspberries per ounce increases to $10, making the new cost of ingredients for one cobbler $(3 	imes 10) + (2 	imes 2) = $30 + $4 = $34. To maintain the same utility level of 10 with the new prices, the cost is 10 cobblers 	imes $34/cobbler = $340. The price-compensating variation is the difference between the new cost and the original cost, which is $340 - $190 = $150.

Caroline Sierra Loves to Eat Raspberry-Apple Cobblers, but Will Only