Five Minute Exercises > Compensating Variation with Cobb-Douglas Preferences

Problem

Given:

A household's expenditure function is M=U*(Px/0.5)^0.5*(Py/0.5)^0.5
Initially, Px=1, Py=1 and the household had U=100
A new policy has caused Px=2 and left Py=1

Determine:

The compensating variation for the policy.

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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 11/07/2011