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Tractable consumer choice

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  • Friedman, Daniel
  • Sákovics, József

Abstract

We present a rational model of consumer choice, which can also serve as a behavioral model. The central construct is (Formula presented.), 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 (Formula presented.) 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. © 2014 Springer Science+Business Media New York.

Suggested Citation

  • Friedman, Daniel & Sákovics, József, 2015. "Tractable consumer choice," Santa Cruz Department of Economics, Working Paper Series qt5kq1w4jv, Department of Economics, UC Santa Cruz.
    • Handle: RePEc:cdl:ucscec:qt5kq1w4jv
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    References listed on IDEAS

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    1. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2013. "Salience and Consumer Choice," Journal of Political Economy, University of Chicago Press, vol. 121(5), pages 803-843.
    2. repec:bla:econom:v:44:y:1977:i:173:p:47-56 is not listed on IDEAS
    3. Bewley, Truman, 1977. "The permanent income hypothesis: A theoretical formulation," Journal of Economic Theory, Elsevier, vol. 16(2), pages 252-292, December.
    4. Tapan Biswas, 2012. "The Marshallian Consumer," Review of Economic Analysis, Digital Initiatives at the University of Waterloo Library, vol. 4(1), pages 165-174, June.
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    Cited by:

    1. Sákovics, József, 2015. "Tractable valuations under uncertainty," Economics Letters, Elsevier, vol. 126(C), pages 68-70.
    2. Sákovics, József, 2014. "Tractable valuations under uncertainty," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-41, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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