Compensating variation

In economics, compensating variation (CV) is a measure of utility change introduced by John Hicks (1939). 'Compensating variation' refers to the amount of additional money an agent would need to reach its initial utility after a change in prices, or a change in product quality, or the introduction of new products. Compensating variation can be used to find the effect of a price change on an agent's net welfare. CV reflects new prices and the old utility level. It is often written using an expenditure function, e(p,u):