Compensating variation

The Compensating Variation ( CV) represents an application of the output function and Hotelling's lemma in the context of price changes

It describes the amount of money that would be given to a household or taken, so that when the new prices come to be attained before the price change utility level.

With:

E ( • ) ... output function

Price vector in period i ...

Utility level in period i ...

The compensating variation is due to the reflection on the Slutsky decomposition, however, describes in contrast to the equivalent variation, a different methodological approach.