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Questions tagged [consumer-theory]

the study of consumer choice and its fundamental underpinnings in preferences and constraints.

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1answer
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what is $b(p)$ in the Almost Ideal Demand System?

In Hal Varian's Microeconomic analysis (page 213) he discusses the Almost Ideal demand system. There he describes the AIDS system as follows: The almost ideal demand system (AIDS) has an ...
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1answer
25 views

Example of a rational and continuous preference relation that does not admit a utility representation

It is well-known that a rational, continuous and monotone preference relation $\succeq$ defined on $\mathbb{R}^L$ admits a utility representation. I would like to understand why monotonicity is ...
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2answers
789 views

Editing formula for finding Marshallian Demand with Cobb-Douglas utility function

Suppose a utility function $u=x_1^ax_2^b$ with $a+b=1$. The following formula finds the values for $x$: $x_1 = \frac{am}{p_1}\\ x_2 = \frac{bm}{p_2}$ But what if the utility function looks like $u=...
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2answers
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What is an example application of a quasilinear utility function?

I am told a quasilinear utility function is a function like $$U(x,y) = \sqrt{x}+y$$ My Question: Can someone provide a real world example of a quasilinear utility function?
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1answer
24 views

Consumer behaviour

If the last dollar spent on commodity X gives him less marginal utility, he will withdraw this amount from X and spend it on Y if it gives him higher marginal utility. Here consumer how can consumer ...
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21 views

Consumer's satisfaction level

If we increase quantity of a commodity or a good will consumer's satisfaction level increase? Here the quantity is NOT CONSUMED by consumer but if he purchase a good more and more of a same commodity ...
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1answer
19 views

Imperfect substitute

Perfect substitute- Pepsi and Coca-Cola and Imperfect substitute- Tea and Coffee . Here why tea and coffee considered imperfect substitute?
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2answers
59 views

feature of indifference curve

The characteristic feature of indifference curve is that it will not touch the X axis or Y axis. But as a special case it will touch the Y axis if the combination is between Money and Commodity. "If ...
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0answers
23 views

Indifference curve for one commodity? [on hold]

"If money is taken on Y-axis, then IC curve can touch oy-axis" here we have taken 'money' on Y-axis and 'commodity' on X-axis. Here my doubt is could we use indifference curve for one commodity? If so ...
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1answer
35 views

Differences between Slope of budget line and MRS?

Slope of budget line= change in y/ change in x and also Marginal rate of substitution= change in y/ change in x. If the definitions are same of both then what is the difference between the two? I ...
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1answer
55 views

Consumer Utility Maximization equivalent of economies of scope

Economies of scope captures the idea of having efficiency in variety. I've come across this idea only in producer theory to capture the idea that companies may benefit from their ability to reduce ...
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1answer
1k views

Are lexicographic preferences strictly monotonic?

I'm a bit confused about lexicographic preferences and whether they abide by the strict monotonicity axiom. The definition we were given for strict monotonicity is: For any two bundles $x$ and $y$,...
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2answers
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How can I motivate a dynamic model using utility and consumer preference where only one good is affected by past consumption?

I've been looking how I can motivate the model I want to estimate using a utility optimization framework. Basically, I want to write a model using two goods: x and y, in two periods: 1 and 2, where ...
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1answer
11k views

Differences between Hicksian and Slutskian approaches

When deriving the substitution effect for both Slutskian and Hicksian definitions, a 'phantom' budget line is drawn.However, for a Slutskian definition, the 'phantom' budget line is drawn parallel to ...
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2answers
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If the consumer is not a price taker, does she still set marginal rate of substitution equal to the price ratio?

Consider some consumer who consumes good $x$ and $y$. The price of $x$ is fixed to be $k$. The price of $y$ is $c(y)$. The consumer's marginal rate of substitution is given by $\frac{-x}{y}$. If the ...
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1answer
35 views

Proof for homogeneity of elasticities

Throughout microeconomic literature i see the following restiriction placed on the nature of elasticities in demand system estimation. This being for some arbitarary good $x$ we require price ...
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1answer
278 views

Money Metric Utility Function: Budget constraints become Utility Functions?

Im currently reading up on the "money metric utility function" (also known as the minimum income function or direct compensation function). By definition it is defined as: $$m(\text{p},\text{x})\...
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Implications of CES on changes in demand

I have a CES utility function, in my class notes I have remark that when the CES is constant and less than one the demand in absolute terms remains unchanged when price of second commodity changes. ...
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2answers
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Is utility in neoclassical economics a circular argument/concept?

Neoclassical economics as a utility function that represents a consumer's preference ordering over a choice set. Joan Robinson criticized utility for being a circular concept: "Utility is the ...
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2answers
104 views

Strongly and strictly increasing utility functions

What's the difference between Strongly and strictly increasing utility functions? What I know is that if $x'>>x $ where $x'$ has all elements strictly greater than $x$ then $U(x')>U(x)$, I ...
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1answer
32 views

Sunk cost fallacy- is it a bug or a feature?

I was having a conversation with a colleague regarding sunk costs, and discussion came up that the appeal of falling for the sunk cost fallacy might be a feature rather than a flaw, as it is behavior ...
3
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1answer
294 views

Diminishing Nature of Utility Function From Convexity of Preference $\succsim$?

Is diminishing nature of utility function in consumer theory stemming from the assumption of convexity on the preference relation $\succsim$? My understanding is: $\succsim$ is convex. Then, $u(.)$...
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1answer
5k views

Calculate the substitution effect

Utility function $$ U=4{q_1}^{0.5}+q_2 \\ Y=10 $$ $$ p_1=p_2=1 $$ Then $p_1$ rises to 2. I would like to ask how to calculate the substitution effect on the demand for q1? What I have done is ...
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3answers
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In Supply and Demand is Quantity the Amount of Inventory of the Amount of Units Sold?

I am new to economics in school and we are going over supply and demand. This may sound like a very simple question, but I just need one thing clarified. When quantity is mentioned in the graphs is ...
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1answer
408 views

Whats the difference between local non-satiation and monotonicity?

Is there a practical difference between local non-satiation and montonicity? Can one exist in a utility function without the other?
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4answers
198 views

what is consumer surplus practically?

In Microeconomics producer surplus is equivalent to profits minus fixed costs. However getting a tangible definition of consumer surplus has been difficult for me to ponder. What is the practical ...
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1answer
30 views

Income Elasticity and Convexity of Demand in Income

What needs to be true about the demand function $z(y)$, where $y$ is income, for the income elasticity $\varepsilon = \frac{dz(y)}{dy}/\frac{z(y)}{y}$ to be always greater than one (so that the good ...
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1answer
148 views

Deriving equation for income offer curve

Sorry if this is a basic question, however I have no idea on how to derive an equation for an income offer curve. All the explanations I'm getting is the graphical one where you just connect the ...
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2answers
91 views

Is it better for economic growth to invest in stocks or to purchase products?

I've recently been interested in economics and I admit that my understanding concerning it is limited. However my question is if investing in stocks is good for the economy. From my understanding, it ...
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0answers
39 views

Afriat's number

I discovered the Afriat's theorem on the possible rationalization of a given data set of demand observations and would like to ask for your help in understanding how to compute Afriat numbers in ...
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1answer
71 views

Slutsky Decomposition from Indirect Utility Function [closed]

Given the indirect utility function: V={M^2}/{4P1P2}, how do we establish the Slutsky Decomposition? I used Roy's Identity to get the Demand, but I'm stuck with the other components of the Slutsky ...
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0answers
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Can the CPIH be used to find the real terms rise in price of a component of the basket of goods?

I want to calculate the real terms rise in UK private rent prices since 2011 using the CPIH measure. The indexes of nominal rent prices and the CPIH rose by 14.7% and 13.5% respectively, so I can say ...
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3answers
92 views

modelling disutility from over consumption

In introductory economics courses the concept of marginal utility is illustrated through simple examples like how much benefit one gets from eating another slice of pizza (i.e first slice provides 100 ...
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6answers
851 views

Piracy/File sharing - Why aren't songs, movies or books given for free?

Why aren't songs, movies or books given for free (+ads)? i. Every minute, people are pirating and there is no stopping that. If people see 0.99 for a song on iTunes and 0.00 for a song on a torrent ...
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1answer
5k views

Is MRS supposed to have a minus sign or not? What's there to say about convexity of preferences?

If we have a utility function $U(x_1, x_2) = x_1(x_2+1)^2$ of some consumer, then $$MRS_{x_1, x_2} = \frac{\color{red}{-}(x_2+1)}{2x_1}$$ Some books have a $\color{red}{-}$. Others and Wiki don't ...
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1answer
86 views

Utility Maximisation Subject to Income and Time Constraints

The consumption of economic goods often takes time. Consider, for example: Transport services, eg flights, rail journeys; Leisure goods, eg watching a film, visiting a park. I would like to explore ...
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21 views

Determine the range for the amount demanded

A consumer consumes two (and only two) goods A and B. Both goods are ìgoodî in the sense that more of either is strictly better. The consumerís preferences are well-behaved (complete, transitive, ...
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Marginal propensity to consume and multiplier effect

Recently I had a conversation with a certain person (call her X) about the marginal propensity to consume (and about the multiplier effect). With marginal propensity to consume I mean $c_1$ as a part ...
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0answers
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Model of sales of a new product

I am looking for any popular model to calculate sales of a new product under the assumption that some goodnesses of the product are given. For example, the novelty $N$ and usefulness $U$ of a new ...
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2answers
123 views

If the (direct) utility is concave in all goods, is the indirect utility necessarily concave in wealth?

Suppose that the direct utility $u(x_1,...,x_n)$ is concave in each of its arguments. Does this imply that the indirect utility $U(w,p)$ is concave with respect to $w$? If all goods are normal than ...
3
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1answer
340 views

Optimization problem with Kuhn-Tucker conditions

Consider a game with two players where each player $i=1,2$ has preferences $u_i=s_i^a c_i^{1−a}$, where $c_i$ is consumption and $s_i$ is social interaction. $s_i$ is given by $s_i=t_i+t_{ij}\times t_{...
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1answer
276 views

Pure exchange economy with free and non-free disposal

Question is as follows: My answers are (I) Let k is constant utility level Then $$k=\sqrt{x_A^1x_A^2}$$ $$k^2/x_A^1=x_A^2$$ The first derivative is negative. So the indifference curve is ...
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3answers
99 views

What do interest rates tell us about the state of an economy?

I seem to have a misconception about what interest rates mean. On one hand, they signal how high a government's demand for money is, because if a government is ever in any serious need of money, they ...
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1answer
154 views

Question on consumption theory

Question: What my did is I proceed this question until that point. But, I will be happy if help me to solve this question. Thank you.
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0answers
54 views

Natural borrowing/debt limit and other borrowing constraints

When confronted with the simple household consumption maximization problem under uncertainty (and with Arrow security sequential trading) $$\max_{\{c_t(s^t),a_{t+1}(s^t,s_{t+1})\}_{t=0}^{\infty}}\...
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1answer
122 views

Maximization with disposable income

Consider a welfare system u dear which a single cash transfer(guaranteed income ) is given to every citizen. Then for each dollar the person earns the payment is reduced to by a where 00 you get a ...
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2answers
320 views

Show that First order conditions are necessary and sufficient for utility maximization

I have a budget set $$B=\{x=(x_1,x_2)\in R^2_+ \mid 2\sqrt{x_1}+x_2\le y\}$$ where $y>0$ is income. Assuming the preferences are strictly monotonic and convex, I want to show that first order ...
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1answer
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Question on consumer theory

The story of my question is I have multiple question. (1) when John doesn’t work in the underground economy at all , t=0, how can I find the optimal value of $l$ and consumption bundle and his ...
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3answers
5k views

What is a rational consumer?

There is a lot of debate on whether or not consumers and investors are rational. Unfortunately, I haven't seen much qualification for what is called a rational consumer. What are the requirements ...