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Approximately Rational Consumer Demand and Ville Cycles

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  • David Jerison
  • Michael Jerison

Abstract

Recent research has shown that small deviations from optimizing behavior can have substantial effects on economic equilibria. Nonoptimizing demand behavior is of particular importance since individual consumer expenditure data often violate the strong axiom of revealed preference, and since the demand of an entire consumption sector is often modeled as the demand of a representative consumer even though it cannot generally be derived from maximization of a single utility function. This paper describes and compares various measures of the extent to which demand behavior deviates from behavior derivable from utility maximization. If a demand function satifies the weak but not the strong axiom of revealed preference, then it is possible for real income to rise monotonically while nominal income and prices follow a smooth path that returns to its starting point. Such a path is called a Ville cycle. The extent of the deviation from optimizing behavior can be measured by the rate at which real income can rise along such a path. We show how this measure is related to alternative measures such as the degree of asymmetry of the Slutsky matrix, and the minimum distance between the given demand function and a function that is derivable from utility maximization. The relationships among these measures yield simple revealed preference interpretations for violations of Slutsky symmetry while suggesting how to compare the sizes of revealed preference inconsistencies.

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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number 246.

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Date of creation: May 1989
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Handle: RePEc:bon:bonsfa:246

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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Cited by:
  1. Russell, Thomas, 1997. "How quasi-rational are you?: A behavioral interpretation of a two form which measures non-integrability of a system of demand equations," Economics Letters, Elsevier, vol. 56(2), pages 181-186, October.
  2. Victor H. Aguiar & Roberto Serrano, 2013. "Slutsky Matrix Norms and the Size of Bounded Rationality," Working Papers 2013-16, Brown University, Department of Economics.
  3. David Jerison & Michael Jerison, 2001. "Real Income Growth And Revealed Preference Inconsistency," Economics Working Papers we012902, Universidad Carlos III, Departamento de Economía.
  4. Michael Jerison & David Jerison, 1991. "Approximately Rational Consumer Demand," Discussion Papers 92-02, University at Albany, SUNY, Department of Economics.

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