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- Title
Price Dependent Preferences.
- Authors
Pollak, Robert A.
- Abstract
This article discusses the implications of price dependent preferences on individual demand behavior. When market prices and normal prices are treated as distinct and independent variables, the resulting model is extremely tractable. I introduce the market price demand functions in Section I. They show demand as a function of market prices, total expenditure, and normal prices. Under the relative price hypothesis, the only restriction other than continuity on the demand functions generated by a simultaneous price dependent preference ordering is that they are homogeneous of degree zero in prices and expenditure and satisfy the budget constraint. Put another way, any system of continuous demand functions homogeneous of degree zero in prices and expenditure which satisfies the budget constraint can be rationalized by a simultaneous price dependent preference ordering satisfying the relative price hypothesis. Compensated demand functions can be defined readily in the unconditional model, since it permits comparisons of alternative quantity-price situations. Kalman uses the unconditional model to argue that a generalized Slutsky equation holds under price dependent preferences, but his compensated demand functions cannot be related to observable behavior when the objects of choice are commodity bundles.
- Subjects
PRICES; BEHAVIOR; HYPOTHESIS; MONEY market; BUDGET
- Publication
American Economic Review, 1977, Vol 67, Issue 2, p64
- ISSN
0002-8282
- Publication type
Article