John consumes two products – X and Y and his preferences are represented by an unknown utility function – u(x,y) (we may assume his indifference curves are well-behaved). His income is m, while the product prices are Px and Py. John was made an offer to sign up for a rewards card. This card would allow him to purchase x at a 10% discount. He would, however, have to pay A dollars to sign up for this card. John is indifferent between accepting and declining the offer. John’s mother has offered to pay the signup price. Alternatively, she’s willing to give John B dollars instead (in which case, John would be prohibited from signing up for the card). John is indifferent between the two options. What can one say about A and B?
- A > B
- A = B
- A < B
- We can’t know the relation between A and B, however if X were known to be a normal good, we could.
- The above answers are incorrect.
I'd appreciate it if someone could direct me to info about the relationship between the compensating variation (CV) and the equivalent variation (EV) and their sizes, dependent on income elasticity (classification of the good as normal\neutral\inferior.