Please answer all parts.

1. Recall in class that we introduced the idea of compensating variation and equivalent variation as ways to measure the change in wellbeing to a consumer following a price change. In class we looked at this in terms of a price increase. Here we look at how to calculate these following a price decrease. Imagine we have a consumer with standard CobbDouglas utility: i i _ 2 2 U rlr2 Suppose we begin with the following: 391 = 5 112225 m: 20,000 a) ( 5 marks) Based on these values, calculate the optimal consumption of 1:1 and 532 and calculate this consumer's utility. b) (5 marks) Imagine the price of good 1 fell to p1 = 4. Calculate the new optmial consumption of 9:1 and 1132 and calculate this consumer's new level of utility. c) (5 marks) Calculate the compensating variation for this consumer. Intuitively, what does this value represent? d) (5 marks) Calculate the equivalent variation for this consumer. Intuitively1 what does this value represent? e) (5 marks) Compare your results from part c) and part d). Why are the values different if they are trying to measure the same thing