Thursday, May 7, 2015

True/False: With Cobb-Douglas preferences, the cross-price elasticity between any two goods is zero.

Answer:
True. Notice that with Cobb-Douglas preferences, total expenditure on any good is fixed regardless of the good's price. (To verify this, do the Lagrangian.) Hence changes in the price of a good would only lead to changes in quantity demand for that good, and not other goods.

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