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Compensating Variation and Equivalent Variation
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Compensating Variation and Equivalent Variation Print out this web page before starting the lab. 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. The compensating payment is positive for a welfare loss and negative for a welfare gain. Think about the payment as being to the consumer in the case of a welfare loss and from the consumer in the case of a welfare gain. Let the economic change be an increase in the price of good x for the consumer choice problem discussed in class. In the figure shown below, a price increase moves the consumer from consumption bundle A to consumption bundle B. To be as well off as before the price increase, the consumer must receive a compensating payment...
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