If Bernice (whose utility function is min{x, y}, where x is her consumption of earrings and y is money left for other stuff) had an income of $15 and was paying a price of $8 for a pair of earrings, then if the price of earrings went up to $13, the equivalent variation of the price change would be
A) $5.36.
B) $8.33.
C) $16.67.
D) $2.68.
E) $6.85.

Question

Quizplus · Accepted Answer

The equivalent variation is the amount of money that would make Bernice indifferent between the old price and the new price. In this case, Bernice's utility function is min{x, y}, so her marginal utility of earrings is 1 and her marginal utility of money is also 1. Therefore, the equivalent variation is the amount of money that would make her indifferent between having 1 pair of earrings and $7 (the old price) and having 1 pair of earrings and $2 (the new price). This amount is $5.36.

If Bernice (Whose Utility Function Is Min{x, Y}, Where X