Demand Functions Are "Homogeneous of Degree Zero in All Prices

question 36

Multiple Choice

Demand functions are "homogeneous of degree zero in all prices and income." This means

• A)a proportional increase in all prices and income will leave quantities demanded unchanged.
• B)a doubling of all prices will not alter consumption decisions.
• C)prices directly enter individuals' utility functions.
• D)an increase in income will cause all quantities demanded to increase proportionately.

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Definitions:

Sinking Fund

A fund established by an entity by setting aside revenue over time for the purpose of paying off debt or replacing a future expense.

Protective Covenants

Clauses in a contract or bond indenture that restrict the borrower from certain activities, aiming to protect creditors.

Real Rates

Interest rates or rates of return that have been adjusted for inflation, showing the real purchasing power of the amount.

Nominal Rates

Interest rates or rates of return on investment that have not been adjusted for inflation, representing the face value of financial instruments.