Economics · General Equilibrium and Numeraire Price
Given below are two statements: Assertion (A): In a competitive general equilibrium with N goods, only relative prices are determined. We can normalise one price (the numeraire) and solve for the remaining (N-1) prices, since one equation is redundant by Walras' Law. Reason (R): Walras' Law says the sum of all excess demands valued at current prices equals zero, implying the system of equilibrium conditions has one degree of freedom - only relative prices matter, not absolute price levels. Choose the most appropriate answer:
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Both (A) and (R) are true, and (R) is the correct explanation of (A)✓
- 2Both (A) and (R) are true, but (R) is NOT the correct explanation of (A)
- 3(A) is true, but (R) is false
- 4(A) is false, but (R) is true
Correct answer
Both (A) and (R) are true, and (R) is the correct explanation of (A)
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