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Why is that the Walrasian demand curve of a good must slope downwards if its wealth (income) effect is positive?
Why is that the Walrasian demand curve of a good must slope downwards if its wealth (income) effect is positive?
Expert Solution
Walrasian demand, also known as Marshallian demand, is named after the economist Alfred Marshall. The Walrasian demand function states that in each price and income (wealth) situation, consumer will buy with the assumption that the problem of utility maximization is perfectly solved. According to this function, utility derived from a good can be measured in terms of money or wealth.
The income (wealth) effect shows that with an increase in price of a good less can be bought from the given income. Similarly, if the price falls an individual can afford more of it.
If the wealth (income) effect is positive, an individual will be able to buy less with the given income, when there is an increase in price of that good. Hence, Walrasian demand curve of a good must slope downwards if its income (wealth) effect is positive.
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