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Coffee Yo/Pc U? Yo/PT Turkish toast Part (c): Suppose you're back at your initial equilibrium, a, shown in the graph below. Now suppose the price of coffee instead increases from $P_c$ to $P_c'$ and suppose that the price of turkish toast is $1 so that you can interpret the x-axis both in terms of turkish toast consumption and in terms of money income. Using the graph below (or recreating it on your own), illustrate your new equilibrium consumption choice of coffee and turkish toast. Label the new equilibrium, b, new quantity demanded of coffee, $C'$, and your new level of utility, $U_1$. Do you buy more or less coffee? Does your welfare (utility level) increase or decrease? Part (d): What is the compensating variation (CV) of the price increase in coffee - i.e. given the new price of coffee, how much does your income need to change in order for you to main- tain your original level of utility, $U_0$? Does your income need to increase or decrease? Does this imply a willingness to pay (WTP) or a willingness to accept compensation (WTA) for the price increase? Illustrate the CV on your graph. Label the consumption bundle that achieves your original level of utility at the new prices, d, your new consumption of coffee, $C''$, and the Coffee Y?/Pc associated income level, Y?. U? Turkish toast, $

          Coffee
Yo/Pc
U?
Yo/PT
Turkish toast
Part (c): Suppose you're back at your initial equilibrium, a, shown in the graph below. Now
suppose the price of coffee instead increases from $P_c$ to $P_c'$ and suppose that the price of turkish
toast is $1 so that you can interpret the x-axis both in terms of turkish toast consumption and
in terms of money income. Using the graph below (or recreating it on your own), illustrate your
new equilibrium consumption choice of coffee and turkish toast. Label the new equilibrium, b,
new quantity demanded of coffee, $C'$, and your new level of utility, $U_1$. Do you buy more or
less coffee? Does your welfare (utility level) increase or decrease?
Part (d): What is the compensating variation (CV) of the price increase in coffee - i.e. given
the new price of coffee, how much does your income need to change in order for you to main-
tain your original level of utility, $U_0$? Does your income need to increase or decrease? Does
this imply a willingness to pay (WTP) or a willingness to accept compensation (WTA) for the
price increase? Illustrate the CV on your graph. Label the consumption bundle that achieves
your original level of utility at the new prices, d, your new consumption of coffee, $C''$, and the
Coffee
Y?/Pc
associated income level, Y?.
U?
Turkish toast, $

Coffee
Yo/Pc
U?
Yo/PT
Turkish toast
Part (c): Suppose you're back at your initial equilibrium, a, shown in the graph below. Now
suppose the price of coffee instead increases from Pc to Pc' and suppose that the price of turkish
toast is 1 so that you can interpret the x-axis both in terms of turkish toast consumption and
in terms of money income. Using the graph below (or recreating it on your own), illustrate your
new equilibrium consumption choice of coffee and turkish toast. Label the new equilibrium, b,
new quantity demanded of coffee,C', and your new level of utility,U1. Do you buy more or
less coffee? Does your welfare (utility level) increase or decrease?
Part (d): What is the compensating variation (CV) of the price increase in coffee - i.e. given
the new price of coffee, how much does your income need to change in order for you to main-
tain your original level of utility,U0? Does your income need to increase or decrease? Does
this imply a willingness to pay (WTP) or a willingness to accept compensation (WTA) for the
price increase? Illustrate the CV on your graph. Label the consumption bundle that achieves
your original level of utility at the new prices, d, your new consumption of coffee,C”, and the
Coffee
Y?/Pc
associated income level, Y?.
U?
Turkish toast,

Added by Sara A.

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