Question

. State whether the following statements are True (T) or False (F)

(a) Marshallian demand functions are homogeneous of degree zero in prices

(b) Hicksian demand function is homogeneous of degree zero in prices

(c) The sign of the slope of the Marshallian demand curve is unambiguously negative as any increase in price is bound to lead to fall in consumption of that commodity

(d) Expenditure minimization is the dual of utility maximization and both lead to the same values of consumption.

(e) Returns to scale pertains to change in output for change in all inputs while marginal returns pertains to change in output due to change in a single input

(f) Let initial output be given by Q = √ K.L. Over time the production function changes to Q = L √ K. The change in technology is capital saving.

Answer 1

(A) TRUE, Marshallian demand functions are homogeneous of degree zero in prices

(B) False - Hicksian demand function is not homogeneous of degree zero in prices

(C) False - Marshallian demand function is generally state the relationship between price of good with the quantity demanded.

(D) True - Expenditure minimization is the dual of utility maximization and both lead to the same values of consumption.

(E) True - Returns to scale pertains to change in output for change in all inputs while marginal returns pertains to change in output due to change in a single input

(F) True - Let initial output be given by Q = √ K.L. Over time the production function changes to Q = L √ K. The change in technology is capital saving.