Demand function is homogeneous of degree zero, Microeconomics

Assignment Help:

Demand Function is Homogeneous of Degree Zero:

Mathematical Presentation 

we will show that demand function is homogeneous of degree zero in prices and money income. In other words, if prices and money income change proportionately, then demand for all goods (and therefore the equilibrium bundle) remain the same. Initial price set p0 = (p10, p20,...,pn0) and the money income is I0 at which commodity vector x0 is bought, where x0 = (x10, x20,...,xn0) and p0x0 = I0. Let there be another commodity set x1 = (x11, x21,...,xn1).  At prices p0 set x1 is not chosen because it is not more expensive than x0 and at that price x1 is available so x0 is revealed preferred to x1. So,  

1177_Demand Function is Homogeneous of Degree Zero.png

Consider a change in prices to p1 = (p11,...,pn1) and income changes to I1, when consumer buys x1. So x0 at that new price level is not available to the consumer and we have,  

399_Demand Function is Homogeneous of Degree Zero1.png

Let I1 = m I0 and p1 = m p0, where m is any positive number. Prices and income change in same proportion m and we have,  

1194_Demand Function is Homogeneous of Degree Zero2.png

Equations (c) and (d) contradict equations (a) and (b). Hence, we conclude that the xand x0 sets are identical and demand functions ( which are functions of prices and quantities) are homogeneous of degree zero and same proportional change in prices and income leads an individual to buy the same bundle.  


Related Discussions:- Demand function is homogeneous of degree zero

Pure monopoly, Pure Monopoly: Pure monopoly examined the market struct...

Pure Monopoly: Pure monopoly examined the market structure that is generally regarded as the polar opposite of perfect competition – i.e. the monopoly model. Like the perfect

Economics of Information and Uncertainty Problem Set, 1. Consider a world w...

1. Consider a world with two assets: a riskless asset paying a zero interest rate, and a risky asset whose return r can take values +10% or –8% with equal probability. An individua

Central problem of economy, explain the central problem of economy with p...

explain the central problem of economy with production possibility curve?

Edge act, Edge Act A federal law passed in 1919 that are available nat...

Edge Act A federal law passed in 1919 that are available national banks to accomplish foreign lending operations through federal or state chartered subsidiaries called Edge Ac

Chap 6, For the pizza seller whose marginal, average variable, and average ...

For the pizza seller whose marginal, average variable, and average total cost curves are shown in the following diagram, what is the profit-maximizing level of output and how much

Canalisation, State trading is often associated with canalisation. Canalisa...

State trading is often associated with canalisation. Canalisation means estaolishment of state monomply in foreign trade. In other words, an item that is canalised can be imported

Indifference curve.., a consumer consumes only two goods x and y is in eqil...

a consumer consumes only two goods x and y is in eqillibrium price of x falls explain the reaction of consumer through utility analysis

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd