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Equivalent variation (EV) is a measure of how much more money a consumer would pay before a price increase to avert the price increase. Because the meaning of "equivalent" may be unclear, it is also called extortionary variation. John Hicks (1939) is attributed with introducing the concept of compensating and equivalent variation.## Value function form

## See also

## References

It is a useful tool when the present prices are the best place to make a comparison.

The value of the equivalent variation is given in terms of the expenditure function ($e(cdot,cdot)$) as

$EV\; =\; e(p\_0,\; u\_1)\; -\; e(p\_0,\; u\_0)$

$=\; e(p\_0,\; u\_1)\; -\; w$

$=\; e(p\_0,\; u\_1)\; -\; e(p\_1,\; u\_1)$

where $w$ is the wealth level, $p\_0$ and $p\_1$ are the old and new prices respectively, and $u\_0$ and $u\_1$ are the old and new utility levels respectively.

Equivalently, in terms of the value function ($v(cdot,cdot)$),

$v(p\_0,w+EV)\; =\; u\_1$

This can be shown to be equivalent to the above by taking the expenditure function of both sides at $p\_0$

$e(p\_0,v(p\_0,w+EV)\; =\; e(p\_0,u\_1)$

$w+EV\; =\; e(p\_0,u\_1)$

$EV\; =\; e(p\_0,u\_1)\; -w$

One of the three identical equations above.

Compensating variation (CV) is a closely related measure of welfare change.

- Mas-Collel, A., Whinston, M and Green, J. (1995) Microeconomic Theory, Oxford University Press, New York.

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Last updated on Tuesday December 11, 2007 at 08:33:02 PST (GMT -0800)

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Last updated on Tuesday December 11, 2007 at 08:33:02 PST (GMT -0800)

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