Microeconomics I
Problem Set 6
Solution
Short Questions
1) Ian views playing Wartcraft and drinking soda as perfect complements (one soda with one
hour of playing Wartcraft). Currently, sodas are $1 each and Wartcraft costs $1 per hour. Ian has
$12 of income.
a. Compute Ian’s Compensating Variation if the price of Wartcraft rises to $2.
Ian initially will purchase six units of each. When the price of Wartcraft rises to $2, the only
bundle which will return Ian to the same indifference curve is (6,6). This bundle now costs $18.
Thus the
CV = $12 – $18 = -$6. We need to pay Ian $6 to return him to the initial utility level following
the price change.
b. Compute Ian’s Equivalent Variation if the price of Wartcraft rises to $2.
After the price change, with an income of $12, Ian will purchase 4 units of each good. If the
prices were still $1 each, then the income level that puts Ian at the bundle (4,4) is $8. So the EV
= $8 – $12 = -$4.
