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Page 6 of 6 - 3. (16 Total Points) Suppose a consumer's utility function is given by U(X, Y) = 5X + 2Y. Also, the
Page 6 of 6 - 3. (16 Total Points) Suppose a consumer's utility function is given by U(X, Y) = 5X + 2Y. Also, the consumer has $30 to spend, and the price of Good X, Px = $1. Let Good Y be a composite good (Good Y is the "numeraire") whose price is Py = $1. So on the Y-axis, we are graphing the amount of money that the consumer has available to spend on all other goods for any given value of X. Suppose the Price of Good X increases to Px = $3. a) (4 points) Calculate the Compensating Variation: (Note that since Px increases, this will be a positive number.) CV = b) (4 points) Calculate the Equivalent Variation: (Note that since Px increases, this will be a positive number.) EV = C) (8 points) In the table below, fill in the Quantity Demanded of Good X (QD) at each price: Px QD of Good X $.5 $1 $2
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