If preferences are homothetic and all prices double while income remains constant, then demand for all goods is halved.

Question

Quizplus · Accepted Answer

Homothetic preferences imply that the consumption bundle is proportional to income. Therefore, if all prices double but income remains constant, the relative prices would not change, and the consumer would still consume the same proportion of each good. However, since the consumer now must spend twice as much to obtain the same bundle, the demand for all goods must be halved to remain within the given budget constraint.

If Preferences Are Homothetic and All Prices Double While Income