3 Compensatory and Equivalent Variations: Two Types of Welfare Measurement

Abstract

The next two questions will help us understand the difference between compensatory and equivalent variations: If relative price of two given commodities had to change, what would the change in income be if we needed to maintain the consumer at the same welfare level given this new situation? If relative price did not change, what would the equivalent change in income be that could produce the same impact as the relative price?