How does Hicks isolate a price effect while preserving original utility?
Find the least-cost budget at new prices tangent to the original indifference curve.
Follow the cause and effect
Calculate U0 from original bundle A.
At new prices, find Hicksian bundle C that attains U0 at minimum cost.
Separate A→C and C→B, then connect to CV or EV.
The model you are using
Conditions for this model
Shared experiment: U=√(xy), m=120, py=6, px 12→6, positive prices and fixed preferences. Finite effects use Hicks; derivatives are evaluated at A. Practice uses the separate setup in step 5.
The exam trap
Do not force the Hicks budget through the old bundle; that defines Slutsky compensation.
Connect the reasoning to the graph
What changes
- The Hicks budget is parallel to the new budget and tangent to the original indifference curve at C.
What stays fixed
Shared experiment: U=√(xy), m=120, py=6, px 12→6, positive prices and fixed preferences. Finite effects use Hicks; derivatives are evaluated at A. Practice uses the separate setup in step 5.
Keep these conditions throughout the comparison; change only what the case above specifies.
What to inspect
Separate A→C and C→B, then connect to CV or EV.
Compare before and after, and locate the conclusion on the graph.
5 MINUTES · TRANSFER THE IDEA
Can you explain it without the lesson?
Explain why Hicks compensation after a price cut is usually no larger than Slutsky compensation.