How do you tell if preferences are homothetic?

How do you tell if preferences are homothetic?

Preferences are intratemporally homothetic if, in the same time period, consumers with different incomes but facing the same prices and having identical preferences will demand goods in the same proportions.

What is budget line explain it with schedule and curve?

Budget line definition The budget line is a graphical delineation of all possible combinations of the two commodities that can be bought with provided income and cost so that the price of each of these combinations is equivalent to the monetary earnings of the customer. The consumer’s purchasing power (his/her income)

What are the differences between budget line and budget set?

The budget line indicates the maximum amount which a consumer can spend on purchasing the goods. As against, Budget Set represents all the combinations of the two goods that lie on or below the budget line. In contrast, the different combinations of two goods that help in drawing the budget line are the budget set.

What is the difference between budget constraint and indifference curve?

An indifference curve is drawn on a budget constraint diagram that shows the tradeoffs between two goods. The utility-maximizing choice along a budget constraint will be the point of tangency where the budget constraint touches an indifference curve at a single point.

Why is Cobb-Douglas homothetic?

It can also be shown algebraically that Cobb-Douglas preferences are homothetic because if XαY 1−α > (X )α(Y )1−α then (tX)α(tY )1−α > (tX )α(tY )1−α. (This is ensured mathematically be- cause the Cobb Douglass utility function is homogeneous, meaning that U(tX, tY ) = tN U(X, Y ) where N is the degree of homogeneity.)

What is the difference between budget and budget line?

The budget line indicates the maximum amount which a consumer can spend on purchasing the goods. As against, Budget Set represents all the combinations of the two goods that lie on or below the budget line. The price of the sets of the goods that form the budget line is equal to the income of the consumer.

How is homothetic preferences preserved in microeconomics?

HOMOTHETIC PREFERENCES Indifference is preserved by equiproportionate scale changes for all goods: indifference curves are radial magnifications or reductions of each other. ) The elasticity of this function is the elasticity of substitution in consumption. For Cobb-Douglas it = 1. For Leontief, it = 0.

Is there an indifference curve that touches the budget line?

The highest achievable indifference curve touches the budget constraint at a single point of tangency. Since an infinite number of indifference curves exist, even if only a few of them are drawn on any given diagram, there will always exist one indifference curve that touches the budget line at a single point of tangency.

What do the UM and uh indifference curves mean?

Each indifference curve (Ul, Um, and Uh) represents one level of utility. First we will explore the meaning of an individual indifference curve and then we will look at the relationship between different indifference curves. Figure 1. Lilly’s Indifference Curves.