The Strong Law of Demand
AbstractWe show that a demand function is derived from maximizing a quasilinear utility function subject to a budget constraint if and only if the demand function is cyclically monotone. On finite data sets consisting of pairs of market prices and consumption vectors, this result is equivalent to a solution of the Afriat inequalities where all the marginal utilities of income are equal. We explore the implications of these results for maximization of a random quasilinear utility function subject to a budget constraint and for representative agent general equilibrium models. The duality theory for cyclically monotone demand is developed using the Legendre-Fenchel transform. In this setting, a consumer's surplus is measured by the conjugate of her utility function.
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Bibliographic InfoPaper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm336.
Date of creation: 28 Jul 2004
Date of revision:
Permanent Income Hypothesis; Afriat's Theorem; Law of Demand; Consumer's Surplus; Testable Restrictions;
Other versions of this item:
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
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- Ruediger Bachmann, 2006. "Testable Implications of Pareto Efficiency and Individualrationality," Economic Theory, Springer, vol. 29(3), pages 489-504, November.
- Donald J. Brown & Caterina Calsamiglia, 2003. "Rationalizing and Curve-Fitting Demand Data with Quasilinear Utilities," Cowles Foundation Discussion Papers 1399R, Cowles Foundation for Research in Economics, Yale University, revised Jul 2004.
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