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

Factor markets, A firm in a perfectly competitive product market takes the ...

A firm in a perfectly competitive product market takes the price of the product as given. Similarly, a firm in a perfectly competitive factor market takes the price of the factor

Planned order releases - mrp system, Planned Order Releases - MRP System ...

Planned Order Releases - MRP System In an MRP system, if gross requirements exceed the quantity on hand and on order, a net requirement results. Planned orders are created to

Market structures, illustrate and discuss the implications of various marke...

illustrate and discuss the implications of various markets structures(competitive and non-competitive) for price dertimation

Austrian economics, Austrian economics is a brand of neo-classical economic...

Austrian economics is a brand of neo-classical economics that was established in Vienna during the late 19th century & first half of the 20th century. Austrian economics was strong

Working of ifc, Working of IFC: The IBRD loans are available only to m...

Working of IFC: The IBRD loans are available only to member-country governments or with the guarantee of member-country governments. Further, IBRD can only make a loan but it

Satisfy the linear relationship, Let {(y i * ; x i ); 1 ≤ i ≤ n} be an i.i....

Let {(y i * ; x i ); 1 ≤ i ≤ n} be an i.i.d sequence of random variables where y i * and x i satisfy the linear relationship y i * = β 0 + β 1 x i + ∈ i with Cov(x i ; ∈

Utility functions, can you help me answer an economics question

can you help me answer an economics question

Mathematical approach to cost functions, Given that TC=1000+10Q-0.9Q^2+0.04...

Given that TC=1000+10Q-0.9Q^2+0.04Q^3,,Find the rate of output Q that result in minimum Average variable cost

Law of variable proportion, discuss the law of variable proportion with the...

discuss the law of variable proportion with the help of isoquants

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