3. Answer:

(a) What is the compensating variation? What is the equivalent

variation? What is the di.erence between them?

(b) You consume two goods, good x and good y. These goods sell

at prices px = 1 and py = 1, respectively. Your preferences are

represented by the following utility function: U(x; y) = x + ln(y):

You have an income of m = 100. How many units of x and y

will you buy and what will is your utility? If px increases from

$1 to $2; .gure out the compensating variation (CV) associated

with price change.

(c) If instead your utility is U(x; y) = ln(x) + y; .gure out the com-

pensating variation (CV) as px increases from $1 to $2:

(d) Are the compensating variations the same for both of the above

utility functions? Explain your answer rigorously.