In general, uncompensated cross-price effects are not equal. That is, \\[\frac{\partial x_{i}}{\partial p_{j}} \neq \frac{\partial x_{j}}{\partial p_{i}}.\\] regardless of relative prices. (This is a generalization of Problem \(6.1 .)\)

Short Answer

Expert verified
Based on the above analysis and solution, the short answer would be: The assertion that uncompensated cross-price effects are not equal is generally true, as the cross-price effects depend on the responsiveness of one good's demand to the price change of another good, and this responsiveness may vary between goods. However, it is essential to consider the specific context and functional forms of the demand functions when analyzing these relationships, as the inequality may not hold true in every situation.

Step by step solution

01

1. Write down the demand functions for two goods.

Let's consider the demand functions for two goods, \(x_i\) and \(x_j\). These demand functions represent the quantity demanded of goods \(i\) and \(j\) respectively, and depend on their respective prices \(p_i\) and \(p_j\). The demand functions can be written as: $$ x_i = x_i(p_i, p_j) $$ $$ x_j = x_j(p_i, p_j) $$
02

2. Calculate the partial derivatives of the demand functions with respect to prices.

Next, we need to find the cross-price effects by calculating the partial derivatives of the demand functions with respect to the other good's price. This will give us: $$ \frac{\partial x_i}{\partial p_j} = \frac{\partial x_i(p_i, p_j)}{\partial p_j} $$ and $$ \frac{\partial x_j}{\partial p_i} = \frac{\partial x_j(p_i, p_j)}{\partial p_i} $$
03

3. Compare the cross-price effects derivatives.

Now we need to compare the cross-price effects by examining if the inequality holds true: $$ \frac{\partial x_i}{\partial p_j} \neq \frac{\partial x_j}{\partial p_i} $$ We can't determine if the inequality holds true for every possible pair of demand functions, as it depends on the specific functional forms and the price changes involved. However, typically in economics, it is reasonable to assume that this inequality holds true in general, since the cross-price effects depend on the responsiveness of one good's demand to the price change of another good and this responsiveness may vary between goods. In conclusion, the given assertion is generally correct for most cases, but it may not hold true in every specific situation. It is important for students to understand the concept of cross-price effects and consider the specific context when analyzing these relationships.

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Most popular questions from this chapter

Ms. Sarah Traveler does not own a car and travels only by bus, train, or plane. Her utility function is given by \\[\text { utility }=b \cdot t \cdot p,\\] where each letter stands for miles traveled by a specific mode. Suppose that the ratio of the price of train travel to that of bus travel \(\left(p_{t} / p_{b}\right)\) never changes a. How might one define a composite commodity for ground transportation? b. Phrase Sarah's optimization problem as one of choosing between ground \((g)\) and air \((p)\) transportation. c. What are Sarah's demand functions for \(g\) and \(p ?\) d. Once Sarah decides how much to spend on \(g\), how will she allocate those expenditures between \(b\) and \(t\) ?

Graphing complements is complicated because a complementary relationship between goods (under Hicks' definition) cannot occur with only two goods. Rather, complementarity necessarily involves the demand relationships among three (or more) goods. In his review of complementarity, Samuelson provides a way of illustrating the concept with a two-dimensional indifference curve diagram (see the Suggested Readings). To examine this construction, assume there are three goods that a consumer might choose. The quantities of these are denoted by \(x_{1}, x_{2},\) and \(x_{3} .\) Now proceed as follows. a. Draw an indifference curve for \(x_{2}\) and \(x_{3},\) holding the quantity of \(x_{1}\) constant at \(x_{1}^{0} .\) This indifference curve will have the customary convex shape. b. Now draw a second (higher) indifference curve for \(x_{2}, x_{3},\) holding \(x_{1}\) constant at \(x_{1}^{0}-h .\) For this new indifference curve, show the amount of extra \(x_{2}\) that would compensate this person for the loss of \(x_{1} ;\) call this amount \(j .\) Similarly, show that amount of extra \(x_{3}\) that would compensate for the loss of \(x_{1}\) and call this amount \(k\) c. Suppose now that an individual is given both amounts \(j\) and \(k\), thereby permitting him or her to move to an even higher \(x_{2}, x_{3}\) indifference curve. Show this move on your graph, and draw this new indifference curve. d. Samuelson now suggests the following definitions: If the new indifference curve corresponds to the indifference curve when \(x_{1}=x_{1}^{0}-2 h,\) goods 2 and 3 are independent. If the new indifference curve provides more utility than when \(x_{1}=x_{1}^{0}-2 h,\) goods 2 and 3 are complements. If the new indifference curve provides less utility than when \(x_{1}=x_{1}^{0}-2 h,\) goods 2 and 3 are substitutes. Show that these graphical definitions are symmetric. e. Discuss how these graphical definitions correspond to Hicks' more mathematical definitions given in the text. f. Looking at your final graph, do you think that this approach fully explains the types of relationships that might exist between \(x_{2}\) and \(x_{3} ?\)

Hard Times Burt buys only rotgut whiskey and jelly donuts to sustain him. For Burt, rotgut whiskey is an inferior good that exhibits Giffen's paradox, although rotgut whiskey and jelly donuts are Hicksian substitutes in the customary sense. Develop an intuitive explanation to suggest why an increase in the price of rotgut whiskey must cause fewer jelly donuts to be bought. That is, the goods must also be gross complements.

Details of the analysis suggested in Problems 6.5 and 6.6 were originally worked out by Borcherding and Silberberg (see the Suggested Readings) based on a supposition first proposed by Alchian and Allen. These authors look at how a transaction charge affects the relative demand for two closely substitutable items. Assume that goods \(x_{2}\) and \(x_{3}\) are close substitutes and are subject to a transaction charge of \(t\) per unit. Suppose also that good 2 is the more expensive of the two goods (i.e., "good apples" as opposed to "cooking apples". Hence the transaction charge lowers the relative price of the more expensive good [i.e., \(\left.\left(p_{2}+t\right) /\left(p_{3}+t\right) \text { decreases as } t \text { increases }\right] .\) This will increase the relative demand for the expensive good if \(\partial\left(x_{2}^{c} / x_{3}^{c}\right) / \partial t > 0\) (where we use compensated demand functions to eliminate pesky income effects). Borcherding and Silberberg show this result will probably hold using the following steps. a. Use the derivative of a quotient rule to expand \(\partial\left(x_{2}^{c} / x_{3}^{c}\right) / \partial t\). b. Use your result from part (a) together with the fact that, in this problem, \(\partial x_{i}^{\epsilon} / \partial t=\partial x_{i}^{c} / \partial p_{2}+\partial x_{i}^{\epsilon} / \partial p_{3}\) for \(i=2,3,\) to show that the derivative we seek can be written as \\[\frac{\partial\left(x_{2}^{c} / x_{3}^{c}\right)}{\partial t}=\frac{x_{2}^{c}}{x_{3}^{c}}\left[\frac{s_{22}}{x_{2}}+\frac{s_{23}}{x_{2}}-\frac{s_{32}}{x_{3}}-\frac{s_{33}}{x_{3}}\right],\\] \(\text { where } s_{i j}=\partial x_{i}^{c} / \partial p_{j}.\) c. Rewrite the result from part (b) in terms of compensated price elasticities: \\[e_{i j}^{c}=\frac{\partial x_{i}^{c}}{\partial p_{j}} \cdot \frac{p_{j}}{x_{i}^{c}},\\] d. Use Hicks' third law (Equation 6.26 ) to show that the term in brackets in parts (b) and (c) can now be written as \\[\left[\left(e_{22}-e_{23}\right)\left(1 / p_{2}-1 / p_{3}\right)+\left(e_{21}-e_{31}\right) / p_{3}\right].\\] e. Develop an intuitive argument about why the expression in part (d) is likely to be positive under the conditions of this problem. Hints: Why is the first product in the brackets positive? Why is the second term in brackets likely to be small? f. Return to Problem 6.6 and provide more complete explanations for these various findings.

Example 6.3 computes the demand functions implied by the three-good CES utility function \\[U(x, y, z)=-\frac{1}{x}-\frac{1}{y}-\frac{1}{z}.\\] a. Use the demand function for \(x\) in Equation 6.32 to determine whether \(x\) and \(y\) or \(x\) and \(z\) are gross substitutes or gross complements. b. How would you determine whether \(x\) and \(y\) or \(x\) and \(z\) are net substitutes or net complements?

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