Impact of Income on Price and Income Responses in the Differential Demand System
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An extension of the Rotterdam model is developed that makes the model’s income
flexibility and marginal propensities to consume varying coefficients. Frisch’s duality
relationships that the second partial derivatives of demand with respect to income and
prices are independent of the order of differentiation are imposed with the marginal
propensities to consume specified as functions of income and price, and the Slutsky
coefficients specified as functions of income only. A uniform substitute specification is used
to analyze the conditional demands for a group of beverages.