Suppose that a consumer has a utility function u(x₁, x₂) = x₁x₂. Initially, the consumer faces prices (1, 2) and has income 10. If the prices change to (4, 2), calculate the compensating and equivalent variations.
a) Compensating Variation = $10, Equivalent Variation = $5
b) Compensating Variation = $5, Equivalent Variation = $10
c) Compensating Variation = $2.50, Equivalent Variation = $7.50
d) Compensating Variation = $7.50, Equivalent Variation = $2.50