Questions tagged [consumer-theory]
the study of consumer choice and its fundamental underpinnings in preferences and constraints.
76 questions with no upvoted or accepted answers
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Certainty equivalence when the utility is semi-continuous instead of continuous
Let $U:\mathbb R^2\to\mathbb R$ be a utility function.
If $U$ is strictly increasing and continuous, then it is well known that for any $(x_1,x_2)$ there exists a certainty $(c,c)$ such that $$U(x_1,...
- 2,084
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votes
0
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Who were the first economists arguing that utility maximization is the core of rationality and economic behavior?
I am looking for the first economists arguing that maximizing utility function is the iff condition of rational behavior.
I've learned that neoclassical economics is founded on this argument. Is this ...
- 2,084
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Continuous logit models - random utility with uncountable choice set
This question is about the mathematical foundations of the continuous logit model, as derived in McFadden (1976) (https://eml.berkeley.edu/reprints/mcfadden/math_theory.pdf) and Ben-Akiva et al (1985) ...
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To what extent are people's preferences quasilinear?
In many economic models (e.g. in auction theory, as well as fair division), it is common to assume that the agents' preferences are quasilinear, that is, their utility to a bundle of items and money ...
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Does consumer demand in the secondhand market actually affect the firsthand market for high-cost goods
In the 21st Century, there is an increasing consumer awareness of the externalities of manufacturing and along with it a stronger consumer preference to buying used goods rather than new.
My question ...
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3
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158
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Economic interpretation of assumption on utility function
Suppose $u\colon \mathbb{R}_{>0} \to \mathbb{R}$ is a utility function, twice continously differentiable, $u' > 0, u'' < 0$, and the classic Inada conditions hold, i.e., $\lim_{c \to \infty} ...
- 73
3
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658
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What are cross price effects for the case of perfect substitutes?
U$(x_1,x_2)$ = $x_1 +x_2$ in the case of perfect substitutes
If $p_1 < p_2$ then $(x_1^*,x_2^*)$ = $(m/p_1,0)$, if $p_1 > p_2$ then $(x_1^*,x_2^*)$ = $(0,m/p_2)$
Trying to figure out how a ...
- 31
3
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Competitive Equilibrium in Securities Market: First Welfare Theorem
I'm working through Kerry Back's "Asset Pricing and Portfolio Choice Theory" book. Trying to work through the proof of the First Welfare Theorem in the context of securities markets on page 58.
Back ...
- 131
3
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524
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Probability of states of nature
I've been given the following question and would really appreciate any help on part a. I've looked over all of my resources for this course and we have always been given the probability of the ...
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Implications of assuming quadratic utility; the search for an alternative
In this answer, I was pointed to the utility function
$$
U(c, y) = c - \frac{c^2}{2} + y
$$
with corresponding demand function
$$
c(p) = 1 -p
$$
which is inelastic for $p < 1/2$. Something that ...
- 297
2
votes
0
answers
47
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Substitutable preferences vs. gross substitutes over indivisible items
I don't really have a background in economics. I'm trying to understand the relationship between these two terms, if they are related at all. The definitions that I understand are here:
Substitutable ...
- 21
2
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answers
58
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Estimating the form of a utility function on two or more commodities
I am looking for experiments for estimating the form a utility function of a consumer on two or more commodities. In particular, I would like to know e.g. if the utility function of a consumer is of ...
- 3,115
2
votes
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82
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Convex Combination of pairs of points
Is it appropriate/meaningful to write vector/points $(a,b) \le (c,d)$, where i would mean component wise each component is $\le$
Specifically is my example below with reference to concavity ...
- 1,011
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35
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What pricing strategies does Amazon use and how do they affect consumers' purchasing decisions?
As a frequent Amazon customer, I have noticed that the prices of products I am interested in buying often fluctuate over time. These changes could either be an increase or decrease in price, and I ...
- 21
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131
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CES in Slutsky matrix (weird results)
We have a Slutsky matrix:
\begin{bmatrix}
\partial x_{1}^H/\partial P_1 & \partial x_{1}^H/\partial P_2 & \dots & \partial x_{1}^H/\partial P_n \\
\partial x_{2}^H/\partial P_1 &...
- 834
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Does local non-satiation hold for this problem?
I am getting some confusing results solving this problem:
$max_{c_0\geq0, c_1\geq0} \bigg\{EU = R(1-c_0) [p t_1 + (1-p) c_1^{-2} t_2] \bigg\} ~ s.t. ~c_0+c_1 \leq 1$
where $p$ is the probability of $...
- 33
2
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0
answers
115
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Expected utility maximization question
If the utility function of an individual is $u(w) = 10 \sqrt{w}$ and the individual starts with $w = 100$ (where $w$ denotes the wealth available to him). If he buys a lottery that costs him $51$ and ...
user43302
2
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356
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Concave preferences have negative SE [Proof]
Question from Intermediate Microeconomics by Hal Varian: Suppose that preferences are concave. Is it still the case that the substitution effect is negative? This is my point: If preferences are ...
2
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answers
148
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Calculate Income Effect and Substitution Effect
In the lecture my professor shows a utility function $u(c,n)=\ln c - an$, where $c$ is consumption and $n$ is working hour, and says that for this kind of preference the income effect and the ...
- 21
2
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0
answers
25
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Index Theorem for Regular Infinite-Agent Economies
A formulation of the Index theorem states that for a regular economy:
$\sum_{p | z(p) = 0, p_L = 1} index p = +1$
Does this hold for models with uncountably many agents?
- 131
2
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162
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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 ...
- 119
2
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0
answers
25
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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 ...
- 21
2
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0
answers
130
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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 ...
- 349
2
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0
answers
404
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MWG Example 3.E.1
I do not understand how Mas-Collel, Whinston, and Green derive the Hicksian demand functions in Example 3.E.1 in their textbook.
Allow me to give further background regarding the problem: The ...
- 31
2
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0
answers
97
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Modelling Supply Induced Demand
How would one go about modelling "supply induced demand" (SID) using the regular supply and demand model and how is SID different from price discrimination?
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2
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0
answers
24
views
What type of data packages am I looking for?
I did a bit of googling and I see there are companies that sell market research data, and wanted to know if anyone knows more about it.
I am specifically looking for consumer interest in the allergic ...
- 121
2
votes
0
answers
538
views
Utility function of a representative agent with quasilinear utility
Consider an economy with $n$ consumers with an identical utility function, which is quasilinear in $x$:
$$ u_i(x,y) = x+u(y) $$
If we want to represent all consumers by a single representative ...
- 3,115
2
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Net effects of mergers from consumers' perspective
When Anthem Insurance acquired Cigna Insurance in July 2015, this reduced consumer choice and possibly transferred negotiating power from the consumer to the insurance provider. But the merger also ...
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Are there any situations where the elasticity version of the Slutsky equation can only be used compared with the regular Slutsky equation?
Regular Slutsky Equation:
$$\frac{\partial x_M}{\partial p_x} = \frac{\partial x_H}{\partial p_x} - \frac{\partial x_M}{\partial m} x _M$$
Elasticity Slutsky Equation:
\begin{align*}\varepsilon_{x,...
- 3,494
2
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0
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Consumer Theory - Relationship between compensating variation (CV) and the equivalent variation (EV)
John consumes two products – X and Y and his preferences are represented by an unknown utility function – u(x,y) (we may assume his indifference curves are well-behaved). His income is m, while the ...
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50
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Monotonicity of Concave Indifference Curves
I'm doing an intermediate micro course, and we've been given a problem asking to draw curves that correspond to the utility function with the expression of a circle centred at (3,4). I understand that ...
- 11
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vote
0
answers
25
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Calculate consumers WTP for product attributes
I have a large panel on the city level of how many cars of each {model, fueltype} combination were newly registered in each year. This panel also includes a large variety of characteristics for each ...
- 11
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0
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Testing for Concavity - Local Maximum & Global Maximum
My question is under which contexts Negative Definitness (ND) vs Negative Semi-Definitness (ND) is required for classifying a global maximiser. And also Global vs Local.
I also want to understand what ...
- 1,011
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Is Theodore Levitt's concept of 'marketing myopia' flawed?
Theodore Levitt's article published in Harvard Business Review says that people do not want quarter-inch drills, they want quarter-inch holes. This line of thought probably emerges from a line of ...
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vote
0
answers
145
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Lump sum income grant is better than a subsidy grant
There is an exercise in a Microeconomics book that says an income grant to a person provides more utility than does a subsidy on one good that costs the same amount to the government. Something like ...
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vote
0
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133
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budget line for ration quota
In this situation there is a particular commodity, like rice, is both available at a subsidized rate from a fair price shop (ration shop) and at a higher price from the open market. Suppose a consumer ...
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0
answers
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Data-driven vs. theory-driven demand system estimation
Context:
When one wants to study consumer demand based on observational data (e.g. household survey data), imposing theoretical restrictions on the coefficients of the demand model seems to be a good ...
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How to calculate substitution and income effect when only 1 bundle is given?
I was given information of a consumer that initially consumed 4 units of both good x and good y with the initial price of $5 for both goods (px = py = 5).
The initial budget constraint is 40 = 5x +5y
...
- 11
1
vote
0
answers
35
views
graph of dependent income
I would need help with the following problem about consumer theory. Let us say that $X$ is the amount of days at the sea and $Y$ is the amount of days on the cottage. We have some utility function $u(...
- 131
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vote
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answer
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How has decreasing quality (or the need to pay more for the same quality) tracked with inflation?
I'm trying to identity a missing variable that could affect poor and middle class consumers more than more wealthy/resourceful individuals.
Assuming that there are decisions regarding cost reductions ...
- 153
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103
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On demand functions and Engel curves
A consumer has utility function $U(x,y)=(x−2)y$, where $x≥2$ and $y≥0$. The price of $x$ is $P_x$, the price of $y$ is $P_y$ and the consumer's income is $I>2P_x$. ($x$ and $y$ do not have to be ...
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Shortcuts for elasticity of substitution
How can I find the elasticity of substitution (I know the definition) if I know the utility function $u(x,y)$? I know its increasing in $x$ and $y$, etcetera, and has everything else you want from a ...
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101
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Difficulty Understanding CPI (Consumer Price Index)
Here's a question about CPI in my microeconomics text (Pindyck), which I don't seem to understand:
The price of computers has fallen substantially over the past two decades. Use this drop in price ...
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0
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Do you know any paper that discuss the effect of the deterrence of fines of individuals' behaviours? What is the difference between a fine a fee?
According to Gneezy and Rustichini the presence of an extrinsic reward in activities with a level of intrinsic motivation (e.g. volunteering) reduces intrinsic motivation, thus it may determine ...
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vote
0
answers
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Is the Hicksian demand curve steeper or flatter than Slutsky demand?
Putting price on the vertical axis and quantity on the horizontal axis, is the Slutsky demand steeper or flatter than the Hicksian demand curve? If I calculate the Slutsky and Hicksian substitution ...
- 217
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vote
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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 ...
- 111
1
vote
0
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375
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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}}\...
- 121
1
vote
0
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332
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Consumer surplus from a Hicksian demand curve: what is it?
A Hicksian demand curve indicates how much of a good will be demanded given price holding level of overall utility fixed.
When in equilibrium with a supply curve we end up with this area we would ...
- 8,847
1
vote
0
answers
248
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Non-linear budget constraints written as union/intersection of linear budget constraints
Let $w$ denote wage. Let the price of each unit of food be $p_1$, the price of the first $M$ units of electricity be $p_2$ and the price of each unit of electricity over $M$ units is $q_2$. $M$ is ...
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vote
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Does this conditional increase in income affect a budget line in the same way as an unconditional increase in income would?
Note: It's been awhile since I've taken introductory microeconomics. I remember increases in income move budget line outward. What if the increases have some condition?
The problem:
Jill has $I$ to ...
- 370