On the Number and the Composition of Varieties

I propose a simple general equilibrium model with nonhomothetic preferences and productivity differences and analyse the number and the composition of varieties in consumption. I obtain the following three results. First, population and labour efficiency have different roles in the income elasticity of demand, thus having different impacts on the number of final goods. Second, given the number of final goods, the composition of varieties is determined by the relative importance of desirability and technological feasibility of each final good. Finally, the equilibrium number and composition of final goods may not necessarily be the same as the optimal ones.