What is meant by compensating variation?

CV, or compensating variation, is the adjustment in income that returns the consumer to the original utility after an economic change has occurred. EV, or equivalent variation is the adjustment in income that changes the consumer’s utility equal to the level that would occur IF the event had happened.

How do you find compensating variation examples?

To calculate the compensating variation, we just subtract her actual M from the value calculated in the previous step. Since she would need $1231 to reach IC1, but only had $1000, the amount that would compensate her for the price change is $231.

What is compensating variation formula?

Compensating variation is the distance between the two budget lines along the vertical axis. µ(p, ¯p, m) = c(ψ(m, ¯p),p) (15) It represents the cost of attaining utility level ψ(m,¯p) when prices are p.

Is compensating variation positive?

In this case the compensating variation is negative – the individual needs to give away money to compensate for the fact that he or she is better off than before.]

What is compensated income?

An income-compensated demand curve is a variant of the demand curve for a good, service, or commodity where changes in price are accompanied by offsetting changes in income so as to control for the income effect.

What is variation in economics?

Equivalent variation (EV) is a measure of economic welfare changes associated with changes in prices. The equivalent variation is the change in wealth, at current prices, that would have the same effect on consumer welfare as would the change in prices, with income unchanged.

What is compensation surplus?

The compensating surplus, or the amount of money which the con- sumer would have to lose, after committing himself to the purchase of that amount which he would choose to purchase after the price fall if no adjustment to his income were made, in order to leave him just as well off as he was before the price fall.

What is compensated and uncompensated demand?

Compensated demand, Hicksian demand, is a demand function that holds utility fixed and minimizes expenditures. Uncompensated demand, Marshallian demand, is a demand function that maximizes utility given prices and wealth.

How do you explain variation?

Variation refers to the differences or deviations from the recognized norm or standard. It may be a modification in structure, form or function in an organism, deviating from other organisms of the same species or group.

Which is the best definition of compensating variation?

‘Compensating variation’ refers to the amount of additional money an agent would need to reach its initial utility after a change in prices, or a change in product quality, or the introduction of new products. Compensating variation can be used to find the effect of a price change on an agent’s net welfare.

What does John Hicks mean by compensating variation?

In economics, compensating variation is a measure of utility change introduced by John Hicks. ‘Compensating variation’ refers to the amount of additional money an agent would need to reach its initial utility after a change in prices, or a change in product quality, or the introduction of new products.

When to use compensating variation in net welfare?

Compensating variation can be used to find the effect of a price change on an agent’s net welfare. CV reflects new prices and the old utility level. It is often written using an expenditure function, e: where is the wealth level, and are the old and new prices respectively, and and are the old and new utility levels respectively.