Here are three possible definitions of "Compensating Variation":
I.the amount a person would be willing to pay to avoid a price increase.
II.the amount of additional income needed to allow a person to restore his or her utility back to its initial level after it has been reduced by a price increase.
III.the amount of income that a person who experienced a price increase would be willing to pay to see the price return to its earlier level.
Which of these definitions is (are)correct?
A)Only I
B)I and II
C)II and III
D)Only III

Question

Here are three possible definitions of "Compensating Variation":
I.the amount a person would be willing to pay to avoid a price increase.
II.the amount of additional income needed to allow a person to restore his or her utility back to its initial level after it has been reduced by a price increase.
III.the amount of income that a person who experienced a price increase would be willing to pay to see the price return to its earlier level.
Which of these definitions is (are)correct?
A)​Only I
B)​I and II
C)​II and III
D)​Only III

Quizplus · Accepted Answer

Compensating variation measures the amount of additional income needed to allow a person to restore their utility level to that before a price increase, so both definitions I and II are correct. Definition III is incorrect as it measures the amount of income a person is willing to pay to restore the price back to its earlier level rather than their utility level.

Here Are Three Possible Definitions of "Compensating Variation