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 $13 and was paying a price of $2 for earrings when the price of earrings went up to $3, then the equivalent variation of the price change was
A)$3.25.
B)$4.33.
C)$8.67.
D)$1.63.
E)$3.79.

Question

Quizplus · Accepted Answer

Bernice's utility function min{x, y} implies she wants to consume equal amounts of x and y. Initially, she can buy 6.5 earrings (13/2), but since she can't buy half an earring, she buys 6 earrings and has $1 left. After the price increase, she can buy 4 earrings (12/3) and have $1 left. To maintain her initial utility level (6 earrings), she needs an additional $3 (6 earrings * $3 = $18, $18 - $13 = $5). The equivalent variation is the amount of money needed to reach the initial utility level at the new prices, which is $3.25.

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