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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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    1. Hauser, John R & Urban, Glen L, 1986. "The Value Priority Hypotheses for Consumer Budget Plans," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 12(4), pages 446-462, March.
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    5. Heymann, Daniel & Leijonhufvud, Axel, 1995. "High Inflation: The Arne Ryde Memorial Lectures," OUP Catalogue, Oxford University Press, number 9780198288442.
    6. Martin L. Weitzman, 1974. "Prices vs. Quantities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(4), pages 477-491.
    7. József Sákovics, 2011. "Reference distorted prices," Quantitative Marketing and Economics (QME), Springer, vol. 9(4), pages 339-363, December.
    8. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(4), pages 1233-1260.
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    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.

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    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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