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

Time serie, uses of time series in indian economy

uses of time series in indian economy

Gdp components, study on internet will impact on gdp

study on internet will impact on gdp

What do you meant by fiscal policy, Question 1: (a) Describe what is Ec...

Question 1: (a) Describe what is Economic growth and describe its relationship with standard of living? (b) Assuming you are the government economist, what policy measures

Consumer surplus, using necessary and sufficient condition explain consumer...

using necessary and sufficient condition explain consumer surplus diagrammically and mathematically?

Impact of government legislations on business, Impact of government legisla...

Impact of government legislations on business in india Government in India plays a dominant role in the Indian business activity. It directs and regulates the private business and

What is cost push inflation, What is Cost Push Inflation Cost Push Inf...

What is Cost Push Inflation Cost Push Inflation :    When a cost of production (e.g. wages) enhances and firms put up prices to maintain profits. Cost increases may occur beca

Baumol’s sales revenue maximization theory, Profit maximization is theoreti...

Profit maximization is theoretically the most sound but practically unattainable objective of business firms. In the light of this statement critically appraise the Baumol’s sales

Find the expression for the gradients of the ac functions, The following ar...

The following are AC and TC functions for various firms (i). AC = 140/Q + 20 (ii) AC - a/Q = k (iii) TC - 10 =2Q + 0.1Q 2 (iv) TC - k - βQ = cQ 2 Where a, k, β and

Production possibility curve, draw a production possibility frontier task u...

draw a production possibility frontier task using the graph and value and identity the pareto efficent and inefficient point and the marginal oppotunity cost of x for each point of

Americas Dependency on China, What will be the effects of americas dependen...

What will be the effects of americas dependency on china?

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