Compensating variation is:
A)the change in income necessary to hold the consumer at the final level of utility as price changes.
B)always the area under the demand curve and above the price paid.
C)the change in income necessary to restore the consumer to the initial level of utility.
D)the difference in the consumer's income between the purchase of the original basket and the new basket at the old prices.

Question

Quizplus · Accepted Answer

Compensating variation is the change in income necessary to restore the consumer to the initial level of utility. It measures the amount of money that a consumer would need to receive or give up in order to be indifferent between the original situation and the situation after a change in prices or income. It is also referred to as the Hicksian compensation. Compensating variation is defined as the change in income necessary to restore the consumer to the initial level of utility after a price change. It represents the amount of additional income that the consumer needs to achieve their original level of satisfaction after a price change.

Compensating Variation Is