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The marginal utility of money: A modern Marshallian approach to consumer choice

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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

  • Jozsef Sakovics & Daniel Friedman, 2011. "The marginal utility of money: A modern Marshallian approach to consumer choice," Edinburgh School of Economics Discussion Paper Series 209, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:209
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    References listed on IDEAS

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    1. Martin L. Weitzman, 1974. "Prices vs. Quantities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(4), pages 477-491.
    2. 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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    4. József Sákovics, 2011. "Reference distorted prices," Quantitative Marketing and Economics (QME), Springer, vol. 9(4), pages 339-363, December.
    5. Xavier Vives, 1987. "Small Income Effects: A Marshallian Theory of Consumer Surplus and Downward Sloping Demand," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(1), pages 87-103.
    6. George J. Stigler, 1950. "The Development of Utility Theory. II," Journal of Political Economy, University of Chicago Press, vol. 58(5), pages 373-373.
    7. J. C. Cox, 1975. "Portfolio Choice and Saving in an Optimal Consumption-Leisure Plan," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 42(1), pages 105-116.
    8. Gerard Debreu, 1959. "Topological Methods in Cardinal Utility Theory," Cowles Foundation Discussion Papers 76, Cowles Foundation for Research in Economics, Yale University.
    9. Deaton, Angus S, 1977. "Involuntary Saving through Unanticipated Inflation," American Economic Review, American Economic Association, vol. 67(5), pages 899-910, December.
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    11. Heymann, Daniel & Leijonhufvud, Axel, 1995. "High Inflation: The Arne Ryde Memorial Lectures," OUP Catalogue, Oxford University Press, number 9780198288442.
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    Cited by:

    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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    More about this item

    Keywords

    budget constraint; separability; value for money;
    All these keywords.

    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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