Question: B. Consider first the demand function x 5 aI/p that emerges from CobbDouglas tastes. a. Derive the income elasticity of demand and explain its sign.

B. Consider first the demand function x 5 aI/p that emerges from Cobb–Douglas tastes.

a. Derive the income elasticity of demand and explain its sign.

b. We know Cobb–Douglas tastes are homothetic. In what way is your answer to

(a) simply a property of homothetic tastes?

c. What is the cross-price elasticity of demand? Can you make sense of that?

d. Without knowing the precise functional form that can describe tastes that are quasilinear in x, how can you show that the income elasticity of demand must be zero?

e. Consider the demand function x1 1p1

, p2 2 5 1ap2

/p1 2

. Derive the income and cross-price elasticities of demand.

f. Can you tell whether the tastes giving rise to this demand function are either quasilinear or homothetic?

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