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The Strong Law of Demand

  • Donald J. Brown

    ()

    (Yale University, Cowles Foundation)

  • Caterina Calsamiglia

    ()

    (Yale University, Faculty of Arts & Sciences, Department of Economics (Box 8268))

We show that a demand function is derived from maximizing a quasilinear utility function subject to a budget constraint if and only if the demand function is cyclically monotone. On finite data sets consisting of pairs of market prices and consumption vectors, this result is equivalent to a solution of the Afriat inequalities where all the marginal utilities of income are equal. We explore the implications of these results for maximization of a random quasilinear utility function subject to a budget constraint and for representative agent general equilibrium models. The duality theory for cyclically monotone demand is developed using the Legendre-Fenchel transform. In this setting, a consumer's surplus is measured by the conjugate of her utility function.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm336.

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Date of creation: 28 Jul 2004
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Handle: RePEc:ysm:somwrk:ysm336
Contact details of provider: Web page: http://icf.som.yale.edu/

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