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Neoclassical Model of Consumer Demand with Identically Priced Commodities; And An Application to Time of Use Electricity Pricing

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Author Info

  • Caves, Douglas W.
  • Christensen, L. R.
  • Herriges, Joseph A.

Abstract

Hick's (1936) theorem allows aggregation of commodities when their relative prices are fixed, but contrary to a widely expressed view, it does not require that they be aggregated. Even in cases in which commodities have identical prices, all of their income elasticities and many of their price elasticities can be identified through econometric estimation. Using data from the Wisconsin Residential Electricity Pricing Experiment, it is demonstrated how a judiciously chosen level of aggregation can shed light on questions of interest without making the analysis unmanageable. Ninety-six electricity commodities can be distinguished by time of use. Partial Hicksian aggregation is performed. The generalized Leontief indirect utility function is used to estimate consumer preferences for 6 electricity commodities although there are only 2 unique prices. It is found that there are significant substitution possibilities between the Hicksian aggregates of peak and offpeak electricity consumption.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 10793.

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Date of creation: 01 Jan 1987
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Publication status: Published in RAND Journal of Economics, Winter 1987, vol. 18 no. 4, pp. 564-580
Handle: RePEc:isu:genres:10793

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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Cited by:
  1. Henley, A & Peirson , J, . "Energy Pricing and Temperature Interaction: British Experimental Evidence," Discussion Papers 9616, Department of Economics, University of Wales, Aberystwyth.
  2. Henley, Andrew & Peirson, John, 1998. "Residential energy demand and the interaction of price and temperature: British experimental evidence," Energy Economics, Elsevier, vol. 20(2), pages 157-171, April.
  3. Mountain, Dean C. & Lawson, Evelyn L., 1995. "Some initial evidence of Canadian responsiveness to time-of-use electricity rates: Detailed daily and monthly analysis," Resource and Energy Economics, Elsevier, vol. 17(2), pages 189-212, August.
  4. Filippini, Massimo, 1995. "Electricity demand by time of use An application of the household AIDS model," Energy Economics, Elsevier, vol. 17(3), pages 197-204, July.

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