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1. Suppose that a consumer has a utility function U(x1, x2) = x 0.5 1 x...

1. Suppose that a consumer has a utility function U(x1, x2) = x 0.5 1 x 0.5 2 . Initial prices are p1 = 1 and p2 = 1, and income is m = 100. Now, the price of good 1 increases to 2.

(a) On the graph, please show initial choice (in black), new choice (in blue), compensating variation (in green) and equivalent variation (in red).

(b) What is amount of the compensating variation? How to interpret it?

(c) What is amount of the equivalent variation? How to interpret it?

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