AbstractA consumer with diminishing marginal utility in consumption, who can search for lower prices, will balance the gains from spreading consumption evenly through time against the benefits of delaying consumption until lower prices are revealed. Optimal programs of consumption, savings and price are characterized for a general formulation of this problem. Intertemporal substitutability is measured by relative-risk aversion. Small relative-risk aversion is sufficient for the intuitive solution: As the best current price rises, more search and less consumption is done. The general model is adapted to special cases. Among other things, this shows that linear utility and sequential search implies calculable reservation prices and consumption only when search stops. However, this characterization is a consequence of the restriction to linear utility. Outside of this context reservation prices and consumption may not be calculable.
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Bibliographic InfoPaper provided by Penn Economics Department in its series Penn CARESS Working Papers with number 30eae25a19493dd4cdf3449d58ba96aa.
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Other versions of this item:
- Richard Manning & Julian Manning, 1994. "Budget-Constrained Search," Game Theory and Information 9406001, EconWPA, revised 17 Jun 1994.
- Richard Manning & Julian Manning, . ""Budget-constrained Search''," CARESS Working Papres 95-09, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
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