-In the above figure point A is the original consumption point.The movement from point A to point C is due to a fall in the price of good Y.Note that B¹,B²,and B³ are budget constraint lines with incomes M¹,M²,and M³ respectively.Also note that B² and B³ are parallel.Calculate the compensating variation (CV) .

Question

-In the above figure point A is the original consumption point.The movement from point A to point C is due to a fall in the price of good Y.Note that B<sup>1</sup>,B<sup>2</sup>,and B<sup>3</sup> are budget constraint lines with incomes M<sup>1</sup>,M<sup>2</sup>,and M<sup>3</sup> respectively.Also note that B<sup>2</sup> and B<sup>3</sup> are parallel.Calculate the compensating variation (CV) . A) CV = M<sup>3</sup> - M<sup>1</sup>. B) CV = M<sup>3</sup> - M<sup>2</sup>. C) CV = M<sup>1</sup> - M<sup>2</sup>. D) CV = M<sup>1</sup> - M<sup>3</sup>.

Quizplus · Accepted Answer

The compensating variation (CV) is the amount of money needed to reach the original utility level after a price change, which is the difference between the new income level (M³) and the income level at the original utility (M²).

-In the Above Figure Point a Is the Original Consumption