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Microeconomics Question from Walter E. Williams:Edit

  • (a) Explain the meaning of the statement: "In the theory of demand, a demand function, such as Qa=F(Pa,Pb,I), is linearly homogenous of degree zero."
  • (b) Demand curves are relatively more elastic in the long run than in the short-run. Explain.
  • (c) Explain the concepts of cardinal and ordinal utility. Discuss how the shortcoming of cardinal utility are resolved in ordinal utility, e.g., diminishing marginal utility.

Answers:Edit

  • (a) Yes – by doubling all prices and income, assuming one does not suffer from money illusion, individual demand remains the same, because relative prices have not changed.
  • (b) It is less costly in the long run to change behavior – this includes adaptation to changes in prices and substitution to less costly alternatives. (see also WEW-022)
  • (c) Cardinal utility refers to a numerical (exact) description of utility. Ordinal utility is a relative ranking. Ordinal says A is preferred to B, but does not indicate the magnitude of that preference.

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