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The marginal utility of money: A modern Marshallian approach to consumer choice

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  • József Sákovics and Daniel Friedman (University of California at Santa Cruz)

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Abstract

We reformulate neoclassical consumer choice by focusing on lamda, the marginal utility of money. As the opportunity cost of current expenditure, lamda is approximated by the slope of the indirect utility function of the continuation. We argue that lamda can largely supplant the role of an arbitrary budget constraint in partial equilibrium analysis. The result is a better grounded, more flexible and more intuitive approach to consumer choice.

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Bibliographic Info

Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 209.

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Length: 31
Date of creation: 02 Aug 2011
Date of revision:
Handle: RePEc:edn:esedps:209

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Keywords: budget constraint; separability; value for money;

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  1. George J. Stigler, 1950. "The Development of Utility Theory. II," Journal of Political Economy, University of Chicago Press, vol. 58, pages 373.
  2. Sákovics, József, 2011. "Reference distorted prices," SIRE Discussion Papers 2011-28, Scottish Institute for Research in Economics (SIRE).
  3. Genesove, David & Mayer, Christopher, 2001. "Loss Aversion and Seller Behaviour: Evidence from the Housing Market," CEPR Discussion Papers 2813, C.E.P.R. Discussion Papers.
  4. Read, Daniel & Loewenstein, George & Rabin, Matthew, 1999. "Choice Bracketing," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 171-97, December.
  5. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
  6. Hauser, John R & Urban, Glen L, 1986. " The Value Priority Hypotheses for Consumer Budget Plans," Journal of Consumer Research, University of Chicago Press, vol. 12(4), pages 446-62, March.
  7. Deaton, Angus S, 1977. "Involuntary Saving through Unanticipated Inflation," American Economic Review, American Economic Association, vol. 67(5), pages 899-910, December.
  8. Vives, Xavier, 1987. "Small Income Effects: A Marshallian Theory of Consumer Surplus and Downward Sloping Demand," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 87-103, January.
  9. Gerard Debreu, 1959. "Topological Methods in Cardinal Utility Theory," Cowles Foundation Discussion Papers 76, Cowles Foundation for Research in Economics, Yale University.
  10. Cox, James C, 1975. "Portfolio Choice and Saving in an Optimal Consumption-Leisure Plan," Review of Economic Studies, Wiley Blackwell, vol. 42(1), pages 105-16, January.
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Cited by:
  1. Friedman, Daniel & Isaac, R. Mark & James, Duncan & Sunder, Shyam, 2014. "Risky Curves: On the Empirical Failure of Expected Utility," Santa Cruz Department of Economics, Working Paper Series qt87v8k86z, Department of Economics, UC Santa Cruz.

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