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

Private benefit and social benefit, Private benefit and social benefit: ...

Private benefit and social benefit: Bridge the gab between private cost and social cost, and private benefit and social benefit.Under perfect market, there may be a divergence

Balance of payments account, Balance of payments account: The foreign ...

Balance of payments account: The foreign exchange market is an organizational setting within which individuals, business firms, banks etc buy and sell foreign currency. It has

Project, Explain welfare grants and subsidies

Explain welfare grants and subsidies

Explain about counter-cyclical policies, Q. Explain about Counter-Cyclical ...

Q. Explain about Counter-Cyclical Policies? Counter-Cyclical Policies:Governments may take many different actions to offset ongoing booms and busts of private-sector economy. T

New classical busines cycle thoery, NEW CLASSICAL BUSINES CYCLE THOERY: ...

NEW CLASSICAL BUSINES CYCLE THOERY: Yang, Xioaokai,  Economics: New Classical versus Neoclassical Frameworks, Oxford: Blackwell Publishers.  The book goes on to rigorously dev

Consumer behaviour, Establish relationship between production and cost for ...

Establish relationship between production and cost for a firm operation in perfect competition market in case of i phone

Risk and cost benefit analysis , COST benefit analysis Costs that ...

COST benefit analysis Costs that are applicable in the project and the benefits that are associated with it are as follows: Risk occurs at different levels. It takes pl

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