Asked by Franco Sagula on Jun 06, 2024
Verified
In the case of homothetic preferences, the entire change in demand from a price change is due to the substitution effect.
Homothetic Preferences
A consumer preference structure in which utility functions display constant returns to scale, meaning relative consumption patterns do not change as income levels change.
Substitution Effect
The change in consumption patterns due to a change in relative prices of goods, leading individuals to substitute cheaper goods for more expensive ones.
- Understand the concepts of homothetic preferences and their implications for consumer demand.
- Examine the effects that fluctuating prices have on consumer purchasing patterns, through the lens of substitution and income effects.
Verified Answer
CW
cristine wauthionJun 12, 2024
Final Answer :
False
Explanation :
In the case of homothetic preferences, both income and substitution effects influence the change in demand following a price change, but the income effect is proportional across income levels, maintaining constant expenditure shares.
Learning Objectives
- Understand the concepts of homothetic preferences and their implications for consumer demand.
- Examine the effects that fluctuating prices have on consumer purchasing patterns, through the lens of substitution and income effects.
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