# Compensating variation and equivalent variation

Compensating variation and equivalent variation are monetary measures of the gain or loss in a consumer’s welfare following an economic change. Compensating Variation (CV) is the compensating payment that leaves the consumer as well off as before the economic change.

When there is a negative economic change, CV is the minimum the consumer needs in order to accept the economic change. 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.

## What is compensating variation in economics?

The compensating variation measures how much extra money the government would have to give the consumer if it wanted to exactly compensate the consumer for the price change. Another way to measure the impact of a price change in monetary terms is to ask how much money would have to be taken away from the consumer

## Which panel shows the Compensating variation and equivalent variation?

Panel A shows the compensating variation (CV), and panel B shows the equivalent variation (EV). One way to answer this question is to ask how much money we would have to give the consumer after the price change to make him just as well off as he was before the price change.

## What is equivalent variation in economics?

The equivalent variation measures the maximum amount of income that the consumer would be willing to pay to avoid the price change. In general the amount of money that the consumer would be willing to pay to avoid a price change would be different from the amount of money that the consumer would have to be paid to compensate him for a price change.

## What is the equivalent variation in income for a \$100 consumer?

Letting m stand for this amount of money and following the same logic as before, Thus if the consumer had an income of \$70 at the original prices, he would be just as well off as he would be facing the new prices and having an income of \$100. The equivalent variation in income is therefore about 100 – 70 – \$30.

## What is equivalent variation example?

The amount of additional income needed to give the level of utility which an individual could have reached if the economic environment had changed. For example, if a price of a good demanded by a consumer were to fall the consumer would be better off.

## How do you find compensating and equivalent variations?

0:026:58Consumer Welfare: Compensating Variation & Equivalent VariationYouTubeStart of suggested clipEnd of suggested clipWe get the budget constraint in city a if the person were to move to city B utility. Function isMoreWe get the budget constraint in city a if the person were to move to city B utility. Function is unchanged income we’re gonna assume is unchanged.

## What is meant by compensating variation?

‘Compensating variation’ refers to the amount of additional money an agent would need to reach their initial utility after a change in prices, 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 is compensating variation formula?

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.

## How do you calculate EV and CV?

CV=how much money we need to give the consumer after the price change to make him just as well off as he was before the price change. EV=how much money we need to take away from the consumer before the price change to make him just as well off as he was after the price change.

## What is the difference between 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.

## Is compensating variation positive or negative?

Compensating variation is negative of the amount of money the consumer would be just willing to accept from the planner to allow the price change to take place. Compensating variation measures the difference in attaining the inital utility level at the initial and subsequent prices.

## What is price equivalent variation?

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. It is a useful tool when the present prices are the best place to make a comparison.

## How do you find the compensating variation from a graph?

1:536:1716. Compensating Variation and Equivalent Variation – YouTubeYouTubeStart of suggested clipEnd of suggested clipYou and the place where we can find compensate variation on this graph. Is in the difference.MoreYou and the place where we can find compensate variation on this graph. Is in the difference. Between the income on this budget constraint and the income.

## How do you calculate compensating variation from utility function?

4:1211:29Three Measures of Consumer Welfare: Compensating Variation …YouTubeStart of suggested clipEnd of suggested clipAnd we’ll see what the compensating variation would be equivalent variation and then the change inMoreAnd we’ll see what the compensating variation would be equivalent variation and then the change in consumer surplus.

## What is equivalent surplus?

Equivalent surplus: The income change required to secure i the utility level she would have had if the change took place (but assuming it does not take place).

## What is the income and substitution effect?

The income effect states that when the price of a good decreases, it is as if the buyer of the good’s income went up. The substitution effect states that when the price of a good decreases, consumers will substitute away from goods that are relatively more expensive to the cheaper good.

## How do you calculate CV in economics?

5:3411:29Three Measures of Consumer Welfare: Compensating Variation …YouTubeStart of suggested clipEnd of suggested clipSo the margin utility of good x divided by the price of good x marginal utility good y divided byMoreSo the margin utility of good x divided by the price of good x marginal utility good y divided by the price of good y.

## What is equivalent variation in economics?

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. It is a useful tool when the present prices are the best place to make a comparison.

## Is compensating variation positive or negative?

Compensating variation is negative of the amount of money the consumer would be just willing to accept from the planner to allow the price change to take place. Compensating variation measures the difference in attaining the inital utility level at the initial and subsequent prices.

## What is income compensated demand curve?

Definition: the compensated demand curve is a demand curve that ignores the income effect of a price change, only taking into account the substitution effect. To do this, utility is held constant from the change in the price of the good.