In: Economics
6. Euler’s theorem (one of many): A function ?(?1,?2,…,??) is said to be homogeneous of degree k, if for any ? > 0, ?(??1,??2,…,???) ≡ ?^? ?(?1,?2,…,??)
a. Explain why a demand function ?(??,??,?) is homogeneous of degree 0.
b. Using part a), prove the sum of the income elasticity and the cross-price elasticity equals the price elasticity of demand. Hint: differentiate the demand function identity in part a) with respect to λ.