Impact of Income on Price and Income Responses in the Differential Demand System

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