Question

Suppose Bernadette has a utility function resulting in an MRS =
Y / X (from U = √XY) and she has an income of $80 (i.e. M = 80).
Suppose she faces the following prices, P_{X} = 6 and
P_{Y} = 5. If the price of good Y goes up to P_{Y}
= 6, while everything else remains the same, find Bernadette’s
equivalent variation (EV).

The answer is EV = - 6.97, please show your work.

Answer #1

Income = 80$

M=80

Px=6 and Py=5

Firstly we will solve B price , Now A price,

Suppose 6x=5y,

M=6x+5y 5y=6.07

80=5y+6y y=1.13

y=7.28 =6.07-5(1.13)

6x=5y =0.94

6x=5(7.28)

6x=36.4

=6.07

Evaluation price= 6.07-0.94=5.13

Actually i tried this question 4 to 5 times and everytime i got this answer , maybe the answer you wrote was incorrect(maybe) please let me know in the comments if you have any problem in the format or in the answer i will try more for you . Please leave a upvote , much needed :)

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