Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Eren’s two main hobbies are taking vacations overseas (V) and eating expensive
meals (M). His utility function is given as: U(V,M) = V2M
Last year, the average price of taking a vacation overseas was US$200 and the average
price of an expensive meal is $50. However, due to supply problems in Onions, the
average price of an expensive meal rose to $75. The average price of a vacation did not
change. His income, which is $1500, did not change.
Suppose that the Department of Welfare wants to know how much should be
given to Eren to offset his change un utility due to the price increase of an expensive
meal. Calculate the compensative variation (CV).
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