Consider a change in price that is accompanied by a change in wealth that returns the consumer to his original level of utility. That is, starting from prices p and wealth w, the consumer obtains exactly the same utility after the change to prices p' and wealth w' as he had before the change. (a) Express the wealth w' in terms of the original wealth w and either the compensating or equivalent variation of a change from prices p to p' keeping the wealth w fixed. Solution: Since CV = w' - w, we have w=w-CV. (b) Use your answer to part (a) to find, as a function of p, p', and w, the value of w' for a consumer with expenditure function e(p, u) = u² (2√PI + √P₂) ². If you are unable to answer part (a), you will get most of the points for this question if you calculate either the compensating or equivalent variation of a change in prices from p to p' (as a function of p, p', and w). Solution: From part (a), w' = w-CV = e(p', v(p, w)). Using the identity e(p, v(p, w)) = w, we obtain Therefore, v(p, w) = + 2√P1 + √P2 2 2 u^² = e(1², v(x,x)) = (2√ √5)² (2√rh + √5)². w e(p',v(p, P₂ √P1+ √P2,

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Product and Price Bundling

Product and price bundling is used as a marketing strategy by businesses, where complementary products and services are combined and sold as a package deal. This bundled price is usually less than the total price of the individual products if they were to be sold separately. When bundled and sold, each product is sold at a reduced price. Using a price bundling strategy helps increase the average revenue per user and also increases the engagement with the user. This happens as the perceived value of the bundled products is more than the individual products.