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Are the consumer preferences homothetic

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Reference no: EM131702308

Suppose a consumer's demand for good 1 is given by x1(p1,p2,m) = m/(2(p1 + p2), and she spends all her income on these two goods.

(a) Find the consumer's demand for good 2.

Now, let the initial prices be p1 = 2 and p2 = 2, and let m = 48. Suppose the price of good 1 drops to p1 = 1.

(b) Is good 1 a normal good or inferior good? Ordinary or Giffen? Is good 2 a complement or substitute for good 1?

(c) Are the consumer's preferences homothetic?

(d) Calculate the change in the consumption of good 1 due to the income e?ect and substitution effect.

Reference no: EM131702308

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