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 $20 and was paying a price of $1 for earrings when the price of earrings went up to $6, then the equivalent variation of the price change was
A)$50.
B)$14.29.
C)$7.14.
D)$100.
E)$32.14.

Question

Quizplus · Accepted Answer

The equivalent variation (EV) measures the amount of money that would leave the consumer as well off after a price change as before it. Bernice's utility function is min{x, y}, indicating perfect complements. Initially, with earrings priced at $1, she could buy 20 earrings (maximizing her utility given her income of $20). When the price increases to $6, to maintain the same level of utility, she would need additional income to afford the same quantity of earrings. The calculation involves finding the income that allows her to buy the same amount of earrings at the new price, which leads to the answer of $14.29 as the equivalent variation. This is because at the new price, maintaining the purchase of 20 earrings would require $120 (20 earrings * $6), and the EV is the difference in income needed to reach the utility level before the price change, adjusted for the original budget.

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