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Exercise 9.3 Suppose that the consumer's utility function with which we represent the con- sumer's preferences is given by: U (x, y) = log (x) + y. Suppose the price of good y equals py and the consumer's income equals m. Suppose that the price of good x increases from på to pr.
g. Compute the compensating variation. What is its interpretation? Graph the appropriate Hicksian demand function and shade the area to the left of it that measures the CV. h. Compute the equivalent variation. What is its interpretation? On the plot from part g., graph the appropriate Hicksian demand function and shade the area to the left of it that measures the EV. i. Compute the consumer's surplus. What is its interpretation? On the plot from part g., graph the appropriate Marshallian demand function and shade the area to the left of it that measures the CS. j. What is the relationship between CV, EV, and CS? Explain your answer carefully.
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