Question

Which of the following are applicable to the individual's expenditure function? 

(A) It is homogeneous of degree zero in all prices. 
(B) It represents the maximum expenditure to achieve a given level of utility. 
(C) It is non-decreasing in prices. 
(D) It is concave in prices. 
Choose the correct answer from the options given below:
 

• A. (A), (B), (C) and (D)
• B. (A), (B) and (C) only
• C. (A) and (B) only
• D. (C) and (D) only

Hint:

The expenditure function is essential in understanding consumer behavior, as it helps determine the minimum cost to achieve a desired level of utility at varying price levels.

Answer 1

The Correct Option is A

Step 1: Understand the Expenditure Function.
The expenditure function represents the minimum expenditure required to achieve a certain level of utility, given the prices of goods. It has several key properties that are linked to the behavior of consumers and their responses to price changes.

Step 2: Analysis of options.
- (A) It is homogeneous of degree zero in all prices: This is correct. The expenditure function is homogeneous of degree zero in prices, meaning if all prices change proportionally, the expenditure required to achieve a certain level of utility remains unchanged.
- (B) It represents the maximum expenditure to achieve a given level of utility: This is correct. The expenditure function represents the minimum amount of money required to reach a certain utility level, not the maximum.
- (C) It is non-decreasing in prices: This is correct. As prices increase, the required expenditure to maintain the same utility level will either stay the same or increase.
- (D) It is concave in prices: This is correct. The expenditure function is concave in prices because it reflects the diminishing marginal utility of income as more is spent.

Step 3: Conclusion.
All the options are applicable to the individual's expenditure function, so the correct answer is (A), (B), (C) and (D).