|
4. As we noted in the last question, the price of beer rose from $1 to $2. In order to compensate Fred (using the expenditure method of compensation) for the income effect of the price increase we need to increase his daily income by:
Using the expenditure method of compensation for a price change simply means giving (or taking away) enough income so that Fred can afford his original consumption bundle (3 brats and 6 beers from Question 2) at the new prices. Since the price of beer increased by $1 and he was originally buying 6 beers, we need to give him an additional $6 to compensate him for the income effect.
|
| Fred's Marginal Utility |
| Q |
MU Brats |
MU Beer |
| 1 |
16 |
11 |
| 2 |
14 |
10 |
| 3 |
12 |
9 |
| 4 |
10 |
8 |
| 5 |
8 |
7 |
| 6 |
6 |
6 |
| 7 |
4 |
5 |
| 8 |
2 |
4 |
|
