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Serena's utiiity function is U (I, y) = 31112 + 6111 3;. Her income is M = 72. The initial prices are P1 = 2
Serena's utiiity function is U (I, y) = 31112 + 6111 3;. Her income is M = 72. The initial prices are P1 = 2 and PH = 2. The price ofX increases to P; = 4. {a} Compute the Equivalent Variation of this change in the price of X. (8 marks) (b) Serena's younger sister. Victoria. also has an income of M = 72 Victoria's utility Function is WI. 1;} = min{zi 9'}. Compute the Equivalent Variation of the change in the price of X. [4 marks] (c) Serena's older sister, Hope, also has an income of M = 1'2. Hope's utility function is W(z.l y) = 22 + 2y. Compute the Equivalent Variation of the change in the price of X. [4 marks] (d) Is Victoria's Equivalent Variation greater or smaller (in magnitude) than Serena's? Give an economic interpretation of why this is the case. ls Hope's Equivalent Variation greater or smaller (in magnitude} than Serena's? Give an economic interpretation of why this is the case. (4 marks}
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