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

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  • Friedman, Daniel
  • Sákovics, József

Abstract

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.

Suggested Citation

  • Friedman, Daniel & Sákovics, József, 2011. "The marginal utility of money: A modern Marshallian approach to consumer choice," SIRE Discussion Papers 2011-61, Scottish Institute for Research in Economics (SIRE).
  • Handle: RePEc:edn:sirdps:349
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    File URL: http://hdl.handle.net/10943/349
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    References listed on IDEAS

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    1. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
    2. George J. Stigler, 1950. "The Development of Utility Theory. II," Journal of Political Economy, University of Chicago Press, pages 373-373.
    3. Hauser, John R & Urban, Glen L, 1986. " The Value Priority Hypotheses for Consumer Budget Plans," Journal of Consumer Research, Oxford University Press, vol. 12(4), pages 446-462, March.
    4. J. C. Cox, 1975. "Portfolio Choice and Saving in an Optimal Consumption-Leisure Plan," Review of Economic Studies, Oxford University Press, vol. 42(1), pages 105-116.
    5. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, Oxford University Press, pages 1233-1260.
    6. Gerard Debreu, 1959. "Topological Methods in Cardinal Utility Theory," Cowles Foundation Discussion Papers 76, Cowles Foundation for Research in Economics, Yale University.
    7. József Sákovics, 2011. "Reference distorted prices," Quantitative Marketing and Economics (QME), Springer, vol. 9(4), pages 339-363, December.
    8. Deaton, Angus S, 1977. "Involuntary Saving through Unanticipated Inflation," American Economic Review, American Economic Association, vol. 67(5), pages 899-910, December.
    9. Read, Daniel & Loewenstein, George & Rabin, Matthew, 1999. "Choice Bracketing," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 171-197, December.
    10. Heymann, Daniel & Leijonhufvud, Axel, 1995. "High Inflation: The Arne Ryde Memorial Lectures," OUP Catalogue, Oxford University Press, number 9780198288442.
    11. Xavier Vives, 1987. "Small Income Effects: A Marshallian Theory of Consumer Surplus and Downward Sloping Demand," Review of Economic Studies, Oxford University Press, vol. 54(1), pages 87-103.
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    Cited by:

    1. Friedman, Daniel & Isaac, R. Mark & James, Duncan & Sunder, Shyam, 2014. "Risky Curves: On the Empirical Failure of Expected Utility," Santa Cruz Department of Economics, Working Paper Series qt87v8k86z, Department of Economics, UC Santa Cruz.

    More about this item

    Keywords

    budget constraint; separability; 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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