ECO 405 Lecture Notes - Lecture 5: Inferior Good, Indifference Curve, Marshallian Demand Function
Document Summary
Individual demand functions are homogeneous of degree 0 in all prices and income. Figure 5. 1 homogeneity: cobb-douglas utility function, utility = u(x,y) = x0. 3y0. 7, the demand functions are: x*, exhibit homogeity and y*, ces utility function, utility = u(x,y) = x0. 5 + y0. 5, the demand functions are: x. Inferior good: over some range of income, a good xi for which xi/i < 0 over that range of income. Figure 5. 1 effect of an increase in income on the quantities of x and y chosen. As income increases from i1 to i2 to i3, the optimal (utility-maximizing) choices of x and y are shown by the successively higher points of tangency. Observe that the budget constraint shifts in a parallel way because its slope (given by -px/py) does not change. Figure 5. 2 an indifference curve map exhibiting inferiority. In this diagram, good z is inferior because the quantity purchased decreases as income increases.
