Normalization

Summary

Normalization

• Always possible to normalize the price of either good to 1 without changing the budget line
• Always possible to normalize income to 1 without changing the budget line

Composite good

• One good can be a basket of many goods
• Common to normalize the price of this good to 1.
• Good 2 is composite: \(p_1x_1+x_2=m\)
• The price of good 1 is now a relative price and \(m\) is relative income .