ECON401 Lecture Notes - Lecture 12: Expenditure Function, Budget Constraint, Hicksian Demand Function
Document Summary
Consider a two-good world in which the consumer is endowed with wealth w and prices. As a consequence of the price change, the consumer"s utility changes from u 1 u (x1 (p1. De ne the equivalent variation measure of the welfare e ects of the price change as the number of dollars it would take to move the consumer"s welfare from u 1 to u 2 at the original prices (p1. 2, w)) to u 2 u (x1 (p2. The compensating variation measure of the welfare e ects of the price change uses the: to measure the welfare change from u 1 to u 2. Using the de nition of the new prices (p2 expenditure function again obtain. With path (a) ev could be written as. There are an in nite number of paths from. 2, u 1(cid:1) e(cid:0)p2 (cid:1) . (cid:1) (cid:0)p2 (cid:0)p1 (cid:1) (cid:0)p2 (cid:1) (cid:1) (cid:0)p2 (cid:1) (cid:0)p1 (cid:1) (cid:0)p2 (cid:1)
