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Tractable consumer choice

Author

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  • Daniel Friedman
  • József Sákovics

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Abstract

We present a rational model of consumer choice, which can also serve as a behavioral model. The central construct is $$\lambda $$ λ , the marginal utility of money, derived from the consumer’s rest-of-life problem. It provides a simple criterion for choosing a consumption bundle in a separable consumption problem. We derive a robust approximation of $$\lambda $$ λ and show how to incorporate liquidity constraints, indivisibilities, and adaptation to a changing environment. We find connections with numerous historical and recent constructs, both behavioral and neoclassical, and draw contrasts with standard partial equilibrium analysis. The result is a better grounded, more flexible, and more intuitive description of consumer choice. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Daniel Friedman & József Sákovics, 2015. "Tractable consumer choice," Theory and Decision, Springer, vol. 79(2), pages 333-358, September.
  • Handle: RePEc:kap:theord:v:79:y:2015:i:2:p:333-358
    DOI: 10.1007/s11238-014-9461-0
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    References listed on IDEAS

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    Cited by:

    1. Sákovics, József, 2015. "Tractable valuations under uncertainty," Economics Letters, Elsevier, vol. 126(C), pages 68-70.

    More about this item

    Keywords

    Separable decisions; Distributed choice; Moneysworth demand; Value for money;

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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