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: Define the Expenditure Function.
The expenditure function quantifies the least amount of money needed to attain a specific utility level, given prevailing commodity prices. Its characteristics are intrinsically linked to consumer behavior and their reactions to price shifts.

Step 2: Evaluate Each Option.
- (A) Homogeneity of Degree Zero in Prices: Correct. If all prices rise proportionally, the expenditure necessary for a fixed utility level remains constant.
- (B) Representation of Maximum Expenditure: Incorrect. The expenditure function denotes the *minimum* expenditure required for a target utility level, not the maximum.
- (C) Non-decreasing with Prices: Correct. An increase in prices will either maintain or elevate the expenditure needed to sustain a constant utility level.
- (D) Concavity in Prices: Correct. The expenditure function exhibits concavity with respect to prices, reflecting the decreasing marginal utility of income as spending rises.

Step 3: Final Determination.
Options (A), (C), and (D) are accurate descriptors of the individual's expenditure function. Option (B) is factually incorrect. Therefore, the correct answer encompasses (A), (C), and (D).