32. Numerical analysis of COMPENSATING VARIATION & EQUIVALENT VARIATION | Eco ( IES, Eco Optional )

#microeconomics #compensatingvariation #equivalentvariation #numerical #inference
Compensating variation and Equivalent Variation are two very important and conceptual topic of microeconomics and is also very much important for competitive exam, as they carry quite a certain amount of weightage.
Compensating variation (CV) is a measure of utility change introduced by John Hicks (1939). 'Compensating variation' refers to the amount of additional money an agent would need to reach their initial utility after a change in prices, a change in product quality, or the introduction of new products. Compensating variation can be used to find the effect of a price change on an agent's net welfare. CV reflects new prices and the old utility level. Equivalent variation (EV) is a measure of economic welfare changes associated with changes in prices. John Hicks (1939) is attributed with introducing the concept of compensating and equivalent variation. The equivalent variation is the change in wealth, at current prices, that would have the same effect on consumer welfare as would the change in prices, with income unchanged. It is a useful tool when the present prices are the best place to make a comparison.

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[rajatagrawal]

Thanks ma'am for this. This is very helpful.
Ma'am, can you also solve question number 3(a) in 2019's general Economics paper 1