Compensating variation

The compensating variation (CV) is an application of the expenditure function and Hotelling's lemma in the course of price changes.

It describes the amount of money that would have to be given or taken from a household in order for it to reach the level of utility it reached before the price change given new prices . ${\displaystyle p^{1}}$ ${\displaystyle u^{0}}$

${\displaystyle CV=e(p^{0},u^{0})-e(p^{1},u^{0})}$

With:

e (•) ... expense function

${\displaystyle p^{i}}$ ... price vector in period i

${\displaystyle u^{i}}$ ... benefit level in period i

The compensating variation results from the considerations on the Slutsky decomposition , but in contrast to the equivalent variation describes a different methodological concept.

literature

• Hal R. Varian, Oldenbourg; Edition: 3rd, completely revised. u. strong adult Edition (January 1994)