Question

Homogeneity of demand functions for proportional changes in all prices and income implies: Select one: a....

Homogeneity of demand functions for proportional changes in all prices and income implies:
Select one:
a. everyone's demand functions are identical
b. equi-proportional changes in prices and income induce the same proportional change in quantity
demanded
c. equi-proportional changes in prices and income induce a more than proportional change in
quantity demanded
d. equi-proportional changes in prices and income leave quantity demanded unchanged
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Answer #1

Option (d) is the correct answer.The homogenity condition of demand function implies that when there is equi proportional changes in the prices and income will have no effect on the quantity demanded and it will leave quantity demanded unchanged.when there is equipropirtionate change in the prices and income theor sum of elasticities will be zero and thus it will have no impact on the quantity demanded.

The other options given are incorrect.In option (a) it is given that under the homogenity condition proportional changes in prices and income implies that demand functions are identical.It is not true homogenity condition implies that the demand will remain unchanged. Options b and c given are also incorrect because under the homogenity condition of demand function when there is an proportionate change in income and price it will not induce any change in the quantity demanded.

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