Munich Personal RePEc Archive

Invisible hand at consumption-leisure production possibility frontier: the allocation of time between goods and services under wage and price dispersions.

Malakhov, Sergey (2020): Invisible hand at consumption-leisure production possibility frontier: the allocation of time between goods and services under wage and price dispersions.

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Abstract

If the equilibrium price is equal to the lowest willingness to pay of consumers with zero search costs, it accumulates under price dispersion the willingness to sell of consumers with positive search costs. The searcher buys optimally at a low price, which equalizes marginal costs of his search with its marginal benefit and maximizes his consumption-leisure utility but now with respect to the equilibrium price. The suboptimal satisficing purchases represent corner solutions; consumers either buy optimally or quit the market. The producer meets the consumer with a price, like he knows in advance his willingness to pay and the time spent on search. The consumption-leisure production possibility frontier optimally allocates his time between production and delivery; it determines not only the quantity to be purchased and the price, but also the meeting point, where the producer stops consumer’s search and sells him goods with leisure. Being unaware of how much the consumer has spent on labor and search, the producer unintentionally optimizes his consumption-leisure choice.

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