How to read this
The price of good 1 falls from to . CV: how much we could take away after the change and leave her as well off as before. EV: how much we would have to give her before the change to make her as well off as after.
- Both are areas to the left of a Hicksian demand curve. The change in consumer surplus uses the Marshallian curve, which lies between them.
- Choose Quasilinear: no income effect, and all three coincide. Inferior good 1: their order flips.
Preferences
The price change
Good 2 is the numéraire: .