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

  • Friedman, Daniel
  • Sákovics, József

We reformulate neoclassical consumer choice by focusing on lambda, the marginal utility of money. As the opportunity cost of current expenditure, lambda is approximated by the slope of the indirect utility function of the continuation. We argue that lambda 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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File URL: http://repo.sire.ac.uk/handle/10943/349
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Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2011-61.

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Date of creation: 2011
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Handle: RePEc:edn:sirdps:349
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  1. József Sákovics, 2011. "Reference distorted prices," ESE Discussion Papers 203, Edinburgh School of Economics, University of Edinburgh.
  2. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
  3. Deaton, Angus S, 1977. "Involuntary Saving through Unanticipated Inflation," American Economic Review, American Economic Association, vol. 67(5), pages 899-910, December.
  4. 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.
  5. Read, Daniel & Loewenstein, George & Rabin, Matthew, 1999. "Choice Bracketing," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 171-97, December.
  6. 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.
  7. George J. Stigler, 1950. "The Development of Utility Theory. II," Journal of Political Economy, University of Chicago Press, vol. 58, pages 373.
  8. 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.
  9. 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.
  10. Gerard Debreu, 1959. "Topological Methods in Cardinal Utility Theory," Cowles Foundation Discussion Papers 76, Cowles Foundation for Research in Economics, Yale University.
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