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I have worked out the expenditure function for a Marshallian demand function, R represents a fixed cost and the questions asks about why the expenditure function is unusual.

The answer explains it is due to the fact that the two prices do not have a homogenous degree of 1 due to the fixed cost R. But I don't get why p1 and p2 need to have a homogenous degree of 1- what is the implication of this?

Thanks

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  • $\begingroup$ Homogeneous of degree one implies that the constraint set of the expenditure minimization problem is unchanged when prices change (I.e. for any scalar $\alpha > 0$ we have that $e(\alpha p, u) = \alpha e(p,u)$) $\endgroup$ – user20105 May 1 '19 at 12:56

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