Econ 655Lapan

(a)Verify its properties: Clearly, for “small” P2 only good 1 is produced, for “large” P2 only good 2 is produced, whereas in the intermediate domain both goods are produced. In the two domains of specialization, G is linear (and hence convex and homogeneous of degree one) in price; similarly, in the intermediate domain (where both goods are produced) G is convex and homogeneous of degree one in price; verifying convexity is straightforward (look at the Hessian, which has positive diagonal elements and is singular).