To calculate the compensating variation, we just subtract her actual M from the value calculated in the previous step. Since she would need $1231 to reach IC1, but only had $1000, the amount that would compensate her for the price change is $231.

What is compensating variation in economics?

CV, or compensating variation, is the adjustment in income that returns the consumer to the original utility after an economic change has occurred. ... When there is a negative economic change, CV is the minimum the consumer needs in order to accept the economic change.

What is price compensating variation?

This is a monetary measure of the welfare effects of the price rise4. It is termed the compensating variation. It tells us how much money should be given to the individual to compensate him or her for the price rise.