A Generalized Utility Model with Binding Non-Negativity Constraints: Demand for Beer
We propose a Generalized Quadratic Utility (GQU) model for an incomplete demand system with binding non-negativity constraints which is flexible in income and price effects. The model accounts for zero consumption using choke prices identified by Kuhn-Tucker conditions. The GQU demand system can overcome the analytical and computational difficulties of the Kuhn-Tucker approach. Applying a homothetic AIDS specification, we estimate the demand for ale and lager beers and find that household income, age, presence of child, and prices play significant roles in beer consumption. The own-price elasticities are greater than unity. The cross-price elasticities suggest substitutes between ales and lagers.
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