Questions tagged [consumer-theory]

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

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5
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2answers
290 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 ...
10
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1answer
3k views

Homogenous of degree one in utility function.

Question My solution is as follows. Please check my solution. If I make a mistake, please tell. I am really not sure about my solution. Thank you U(x) is homogenous of degree one i.e. u(...
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1answer
210 views

Empty edgeworth box [closed]

Can a empty edgeworth box be a pareto set? What kind of economy would be describe in this situation?
2
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0answers
56 views

Could be this picture be interpreteded as a pareto set? [closed]

Hi, is there a way to interpret this picture as a Pareto set? What assumptions are necessary for such an interpretation?
3
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2answers
4k views

Why does local non satiation imply the constraint is binding?

Local non satiation says that for any $x \in X$ and $\epsilon > 0$, there exists $y \in X$ such that $d(x,y) < \epsilon$ and $U(x) < U(y)$. I don't understand why this implies that $px^* = m$...
0
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0answers
414 views

Euler equation - Intuition behind setting $\beta(1+r)=1$ if the economy is closed

The Euler equation is: $$u(C_{t})=\beta(1+r)U(C_{t+1})$$ In my lecture notes, I noted that my prof. said something like: Since our economy is closed, we are going to assume that $\beta(1+r)=1$ ...
2
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1answer
1k views

Explaining why Hicksian demand is more inelastic to intermediate micro student

How would you best explain to a student in intermediate micro class that the Hicksian demand for a normal good is more inelastic than the Walrasian demand without heavy differential calculus? When I ...
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0answers
193 views

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 ...
6
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3answers
8k 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 ...
2
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1answer
3k views

Are Cobb-Douglas preferences homothetic?

Our lecture defined a preference to be homothetic, if the following is true: $$(x_1, x_2) \thicksim (y_1, y_2) \Leftrightarrow (kx_1, kx_2) \thicksim (ky_1, ky_2)$$ Cobb-Douglas preferences can be ...
3
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1answer
114 views

Consumer Econometrics: Identifying nature of goods

I have some data on household income and goods purchased. The first three columns and rows are: ...
1
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1answer
98 views

CARA Coefficient Calculation

Consider the following scenario: A consumer with CARA (constant absolute risk aversion) claims that she is indifferent between "getting $2400 for sure" and "getting $5000 or $0, each with 50% ...
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1answer
2k views

Link between elasticity and marginal utility

The above is taken from "Economics" 8th Edition by John Sloman, a textbook commonly used at the introductory undergraduate level. I would like assistance in understanding the bracketed portion - how ...
0
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2answers
58 views

Driving down the price of a good

I've been thinking about this situation lately: A normal good $x$'s price has become unreasonably high. Would it be a good idea for consumers to boycott (i.e. stop buying) $x$ in order to drive down ...
1
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1answer
488 views

Help with CES Utility Function exercise

I am attempting to solve the following CES Utility Function problem: However, I am running into issues when I get to 3). For 1) I have $K = \left(\frac{\omega p_1}{p_2}\right)^{\frac{1}{p+1}}$ ...
8
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0answers
497 views

Calculus and Indifference Curves in an Urban Economics Example

I am reading the paper 'The Structure of Urban Equilibria' by Jan Brueckner. It uses a monocentric city model, where all consumers earn income $y$ at the centre of the city. They buy $q$ housing for ...
4
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2answers
1k views

Meaning of Additively Separable, Linear in X

Often I see both in micro and macro two common terminology : Additively separable. Linear in price or linear in probability. I understand exactly as they sound by looking at the functional form ...
0
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1answer
144 views

Example in which revealed preference doesn't imply preference

I'm studying Varian's Intermediate Microeconomics, in which the principle of revealed principle is stated as follows (for now we're assuming strictly convex indifference curves): Let $(x_1, x_2)$ be ...
2
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1answer
2k 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 $y$,...
2
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2answers
755 views

Lancaster's Characteristics Theory

In 1966 Kevin Lancaster proposed a new Economic Theory based on product characteristics instead of product utility. I would like to know the status of this theory nowadays among economists ...
2
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2answers
6k views

Relation between linear utility function and U=max{x,y}

I'm studying general equilibrium theory, and in the study guide I came across a utility function of the type $U=\max\{x,y\}$, which I'm not that familiar with. I study mainly from two books: ...
3
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1answer
223 views

How do we estimate utility functions?

Throughout the course load of an economics student's undergrad we are exposed to the concept of cardinal utility via utility functions which give us a specific quantifiable number of "utilis" as a ...
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3answers
4k views

Optimal decision for perfect substitutes utility function ?

Given $u(x_1,x_2)=4x_1+14x_2$ and $m=\frac{1}{2}x_1+\frac{3}{2}x_2$, I shall choose the optimal decision among: $a)(2m,\frac{2m}{3})$ $b)(2m,0)$ $c)(\frac{m}{2},0)$ $d)(0,\frac{2m}{...
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1answer
33 views

Economic concept where turning something down heightens emotional attachment

For example, say a person has turned down an offer for a competing position with another company. That person now has an increased sense of attachment to their current position with the logic "I ...
0
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1answer
158 views

Effects of shocking budget or indifference curves on optimum point?

I am supposed to determine if shocking either the income or preferences would certainly change the optimum solution in case of a corner solution?
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1answer
493 views

Verification of understanding of the substitution and income effect of normal, inferior and Giffen goods?

My understanding is as follows: Normal Goods: Income and Substitution effects are both positive. Inferior Goods: Income effect negative, substitution effect positive. Substitution effect outweighs ...
4
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1answer
489 views

How do I represent this indifference curve graphically?

I am not able to visualize this indifference curve. I consume only two goods: sugar and milk. I will prefer a bundle X of sugar and milk over a bundle Y only if $x_{sugar} > y_{sugar}$, and $x_{...
-1
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1answer
143 views

Utility Maximization [closed]

Assume the utility function is $u(x,y,z)=y*min[x,z]$. The prices of all three goods are equal. The agent has an amount $M$ to spend on the goods. He has to choose one of the following schemes: A) Get ...
4
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2answers
266 views

Research Design: Indifference curves and budget lines

I have a basic Idea on how to construct indifference curves such that we must use two goods and then ask for pairs of bundles which are preference indifferent. When doing applied research on ...
3
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1answer
81 views

Research on the existence of utility functions?

I've been having difficulty finding some research on indifference curves/utility functions and methods in constructing them in an applied manner. Does anyone have any papers or pdf books to ...
0
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2answers
35k views

Determining optimal consumption bundle [closed]

The utility function of the consumer is $5x^{0.5}y^{0.5}$ The income of the consumer is $5000$ The price of good $x$ is $1,000$ and the price of good $y$ is $500$. Determine the optimal ...
-1
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1answer
371 views

What consumer preferences exhaust the budget?

Suppose that a consumer has a complete and transitive preference relation over R+. Further suppose that the consumer faces prices p = (p1,p2,...,p) 0 and has ...
2
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2answers
75 views

Economic Confirmation Biases

I'm not sure if this is the right place to post this, since my question is a bit more general to all of social sciences (indeed sciences in general), but I figured since Economics is a social science ...
2
votes
1answer
3k views

Why is EV<CV if the good is inferior?

Through the Slutsky equation I know that if the good is inferior the marshallian demand function is steeper than the hicksian demand but I cannot understand why the Compensating variation is higher ...
9
votes
2answers
864 views

Thin indifference curves

If a consumer follows the rationality axiom of continuity (i.e. no jumps in his preferences), the indifference curves of a utility function are said to be thin. Why does continuity ($x \succeq y \...
3
votes
1answer
128 views

Suppose I have a preference satisfy all basic assumptions, how to show consumer problem solution is unique

The preferences are complete, transitive, continuous, strictly monotone and strictly convex The textbook says it is because (1) Budget Set is compact so that a solution exists; (2) B is convex and ...
1
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2answers
1k views

Utility function used to indicate bliss point

How does one create a utility function to indicate existence of a bliss point? what do the goods marshillian demands look like in such a situation?
1
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1answer
26 views

Recommended ratio of sells of software of basic and advance edition

Our company is selling one software in two edition: - cheap one with basic features - expensive one with basic and advance features According to sells statistic, more than 90% of people are buying ...
2
votes
1answer
211 views

Consumer demand: a function of present endowment?

I don't know about you, but each time I go shopping for groceries, my purchasing decision takes into account what I already have at home. I don't make only one demand decision for my entire life the ...
0
votes
1answer
183 views

Optimal consumtion bundle of lemons and sugar [closed]

Alex consumes only lemons and sugar. For each lemon he requires exactly 2 spoons of sugar. He doesn't like more sugar on his lemons, and he won't eat lemons with less sugar. What is Alex's optimal ...
2
votes
1answer
809 views

More direct way to derive indirect utility function from expenditure function

I have this general form for a expenditure function $e(p,u)=f(u)\cdot g(p)$ where $f(u)$ is increasing monotonic. How can I derive a functional form for an indirect utility function from this ...
2
votes
2answers
127 views

Can there be sensible choice behavior that violates the Weak Axiom of Revealed Preference?

Following the notation of Mas-Collel, Whinston, and Green, consider a family of budget sets $\mathcal{B}=\{\{x,y\},\{x,y,z\}\}$. To make the example concrete, let's let $x$ be a book $y$ be a left ...
2
votes
1answer
82 views

Comparing baskets of goods in this exercise

Max buys two goods, apple and ketchup. We do not observe his preference but we know it satisfies the three assumptions, completeness, transitivity, and more is better. And as usual, we know his ...
1
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1answer
70 views

Clearly explaining the concept of “normalizing” price and relative prices to undergraduate

I am trying to clearly explain to the concept of "normalization" or relative prices. Because students are so used to just think of prices in absolute terms, it is initially tough to make the leap to ...
1
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0answers
82 views

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?
0
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2answers
762 views

Consumer Theory (Finding demand functions)

Suppose that Sally’s preferences over baskets containing food (good $x$), and clothing (good $y$), are described by the utility function $u (x, y) = \sqrt{x} + y$. Sally’s corresponding marginal ...
-1
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1answer
234 views

Consumer Theory (Finding demand function) [closed]

Here's the question that I really need help with: $$U(x,y)=(x^{0.5})+y$$ $MUx=\frac{1}{2x^{0.5}}$ and $MUy=1$, where $x$ is food, $y$ is clothing $Px$ is the price of food, $Py$ is the price of ...
-1
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1answer
16k views

How do you know if a good is a complement or a substitute from given demand and supply functions? [closed]

QD1 = 190 - 2P1 - 2P2 QS1 = - 10 + 2P1 QD2 = 240 - 2P1 - 4P2 QS2 = - 40 + P2 Are these goods substitutes or complements?
3
votes
1answer
472 views

Negative consumer externality vs demerit good - what's the difference?

The example I was given for each was cigarettes. What market may have negative consumer externalities but is not a market for a demerit good? What is a type of demerit good that may not have a ...
1
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1answer
76 views

Is the study of the volunteer sector inappropriate for a labour economist?

In the basics of labour economics the driving factor for increase in labour supply (for the workers in a given market) is increase in wages. The volunteer sector consists of general and skilled ...