We introduce non-homothetic preferences in the Dixit-Stiglitz model of monopolistic competition, and enquire about the espects of a change in income dispersion on the firms' optimal decisions and market equilibrium.
Income dispersion, modelled as a mean preserving spread, is shown to aspect only the degree of product disperentiation under the standard hypothesis on the firms' decision making process, while it generates a positive co-movement of demand and demand elasticity, when the negligibility assumption is re-moved and the price index effect is taken into account. JEL Classification no: D31, L11, L16.