Through the Slutsky equation I know that if the good is inferior the marshallian demand function is steeper than the hicksian demand but I cannot understand why the Compensating variation is higher than the equivalent variation. Is this because the increase in utility shifts the hicksian to the left instead of shifting it to the right (in a graph with prices as y and demand as x)?

  • $\begingroup$ No, EV>(ConsumerSurplus>)CV if the good is normal and the other way around if it is inferior. I am just struggling with justifying this last assertion. $\endgroup$ – Ramiro Nov 1 '16 at 20:55
  • $\begingroup$ I believe you are mistaken. In the symmetric Cobb-Douglas case $U(x,y) = x \cdot y$ none of the goods are inferior. Yet if you have income $m > 0$, prices $p_x = p_y = 1$ and altered price $p_x' = 4$ you will have $CV = m > \frac{m}{2} = EV$. $\endgroup$ – Giskard Nov 1 '16 at 22:04
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    $\begingroup$ I think it's possible to have EV=CV=CS, when there is no wealth effect. Let me mess around with a utility function that's quasilinear in one good to double-check. $\endgroup$ – Theoretical Economist Dec 2 '16 at 0:49

I believe Marshallian demands are less steep than Hicksian demands because we reverse the y and x axis in economics. Thus a larger derivative of x with respect to p will be less steep since p is on the vertical and x is on the horizontal.enter image description here

(image from here)

  • $\begingroup$ You are completely right but does that imply a shift in the welfare inequalities if the good is inferior? (Turning EV>CS>CV into CV>CS>CV) $\endgroup$ – Ramiro Nov 2 '16 at 14:23

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