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

Copper, Around 2007, the world copper price was $2.00 per pound and 12 mill...

Around 2007, the world copper price was $2.00 per pound and 12 million metric tons per year was the quantity transacted. A) Assume copper’s demand elasticity is -.5 and supply elas

Demands for the two market are P1=15-, demand for two market are P1=15-Q1&P...

demand for two market are P1=15-Q1&P2=25-Q2.the monopoly TC is C=5+3(Q1+Q2).What are ,output,profit&MR if the monopolist can price disc? riminate

Marginal utility approach, using the marginal utility approach discuss how ...

using the marginal utility approach discuss how economic theory explains the optimum pattern of consumption for an individual consumer

Explain socio economic development, Question 1: The socio economic deve...

Question 1: The socio economic development of Mauritius has been marked by growth cycles, representing different approaches adopted by Government to meet the internal as well

Find the marginal utilities, An individual derives utility from consuming g...

An individual derives utility from consuming goods X and Y according to the following estimated utility function U = 12X 2/3 Y ¼       X and Y are quantities (units) of

#title.demand and supply ., a. Determine Australia’s market equilibrium ...

a. Determine Australia’s market equilibrium for TV sets. i. (1) What are the equilibrium price and quantity?

State-owned enterprises should be encouraged or discouraged, Question 1: ...

Question 1: a. What is the supposed rationale for subsidising higher education in various developing countries? b. Do you think there is a legitimate rationale to the abov

Supply and demand with graphs, Supply function given by equation QS = 3P - ...

Supply function given by equation QS = 3P - 50. Write an equation proposals if: a) Government introduces subsidies of 5 $ per unit; b) the government introduced subsidies of 15%

Wages and labor supply: equivalent to the utility , Labor cannot be divided...

Labor cannot be divided from the human being who provides it.  The result of the inseparability of labor from the people who gives it, is that the wage for the last hour worked mus

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