Price Effects on Compound Commodities

Junichi Minagawa and Thorsten Upmann

No 6060, CESifo Working Paper Series from CESifo

Abstract: We explore effects of simultaneous price changes for the demand of a group of goods, which we refer to as a compound commodity. Specifically, we consider unit and proportional cost components (e. g., taxes, transportation costs, etc.) imposed on the compound commodity. We find that there is a serious aggregation problem implying that the property of a downward-sloping demand curve does not generally hold for the demand of a compound commodity. Notably, both substitution effects of the unit cost and of the proportional cost for a compound commodity may be unambiguously opposed. Finally, we apply these results to commodity taxation.

Keywords: demand for a group of goods; compound commodity; unit and proportional costs; income and substitution effects; Slutsky equation; Giffen goods (search for similar items in EconPapers)
JEL-codes: D01 D11 H20 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_6060

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