Problem 2: Welfare measurements

Suppose that an individual has a utility function of the form: U=E^0.25+Y^0.7, where E is some index of environmental quality and Y-income. Given initial values of E₀=1 and Y₀=100, calculate CS and ES for an increase in E to level 2 (that is, E₁=2) and a decrease of E to 0.5 (that is, E₂=0.5). That is, calculate two sets of CS and ES.

Hint: Start by drawing the graph and graphically identify the ES and CS under each scenario. Refer to the table in the slides for the interpretation of the metrics.

Can we use a Marshallian demand curve to approximate the ES & CS in this case?