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Using the compensating and equivalent variations to define the Slutsky Equation under a discrete price change

Author

Listed:
  • Robert Sproule

    (Bishop's University)

  • Ambrose Leung

    (Bishop's University)

Abstract

In our experience, all textbook presentations of the Slutsky Equation under a discrete price change use a compensation scheme based on the compensating variation. Our students have sensed this convention is arbitrary in that they have asked, why consider this compensation scheme, and not one based on the equivalent variation? The present paper outlines how one might address this matter analytically, and then discusses how our findings provide a new insight into the Giffen Paradox.

Suggested Citation

  • Robert Sproule & Ambrose Leung, 2007. "Using the compensating and equivalent variations to define the Slutsky Equation under a discrete price change," Economics Bulletin, AccessEcon, vol. 4(11), pages 1-9.
    • Handle: RePEc:ebl:ecbull:eb-07d00001
    as

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    File URL: http://www.accessecon.com/pubs/EB/2007/Volume4/EB-07D00001A.pdf
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    References listed on IDEAS

    as
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    5. Peter C. Dooley, 1983. "Slutsky's Equation is Pareto's Solution," History of Political Economy, Duke University Press, vol. 15(4), pages 513-517, Winter.
    6. Christian Weber, 2002. "Did Pareto discover income and substitution effects? On an interpretation suggested by Hutchison," Economics Bulletin, AccessEcon, vol. 2(2), pages 1-6.
    7. Dougan, William R, 1982. "Giffen Goods and the Law of Demand," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 809-815, August.
    8. Christian Weber, 2002. "Linearity, Slutsky symmetry, and a conjecture of Hicks," Economics Bulletin, AccessEcon, vol. 4(12), pages 1-5.
    9. Cornes,Richard, 1992. "Duality and Modern Economics," Cambridge Books, Cambridge University Press, number 9780521336017.
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    Cited by:

    1. Haradhan Kumar Mohajan, 2017. "Analysis of Reciprocity and Substitution Theorems, and Slutsky Equation," Noble International Journal of Economics and Financial Research, Noble Academic Publsiher, vol. 2(3), pages 54-75, March.

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    More about this item

    Keywords

    Compensating Variation;

    JEL classification:

    • D0 - Microeconomics - - General
    • A2 - General Economics and Teaching - - Economic Education and Teaching of Economics

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