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Theory of Consumer Behavior When Prices Enter the Utility Function

Peter Jason Kalman
Econometrica
Vol. 36, No. 3/4 (Jul. - Oct., 1968), pp. 497-510
Published by: The Econometric Society
DOI: 10.2307/1909519
Stable URL: http://www.jstor.org/stable/1909519
Page Count: 14
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Theory of Consumer Behavior When Prices Enter the Utility Function
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Abstract

In this paper, an extension of the theory of consumer behavior to cover situations when prices enter the utility function is considered. In Section 1 we formulate the problem. In Section 2 we derive a generalized Slutsky equation of which the traditional Slutsky equation is a special case. We investigate the class of utility functions that yield homogeneous of degree zero in prices and income demand functions and also see that these can't exist for a certain class of utility functions. We then establish theorems on "substitutable" and "complementary" commodities which are not, in general, valid for the traditional theory. Finally, a set of qualitative restrictions on demand functions is deduced, of which a subset is identical to the traditional restrictions.

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