Money flexibility and optimal consumption-leisure choice under price dispersion

Malakhov, Sergey (2013): Money flexibility and optimal consumption-leisure choice under price dispersion.

Abstract

The synthesis of the G.Sigler’s rule of the optimal search with the classical individual labor supply model enlarges the understanding of the phenomenon of money flexibility. The constraints of the search model makes the Lagrangian multiplier equal to the marginal utility of the wage rate and establish the correspondence between the purchase price elasticity of the marginal utility of consumption expenditures, the wage rate elasticity of the marginal utility of money, and the wage rate elasticity of purchase prices. This correspondence can review the “leisure model” of behavior as well as the Veblen effect. The phenomenon of the sunk costs sensitivity also becomes more understandable.

• Item Type: MPRA Paper
• Language: English
• Keywords: money flexibility, consumption leisure choice, search, Veblen effect
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness

References

1.Aguiar, M., Hurst E. (2007). ‘Measuring Trends in Leisure: The Allocation of Time over Five Decades’ Quarterly Journal of Economics, 122(3), 969-1006.

2.Baxley J.V and Moorhouse J.C. (1984) ‘Lagrange Multiplier Problems in Economics’ American Mathematical Monthly, 91, (7), 404–412.

3.Blaug, M. (1997)’Economic Theory in Retrospect’, 5th Ed., Cambridge University Press

4.Diamond P. (1971). ‘A Model of Price Adjustment’ Journal of Economic Theory, 3, 156-168.

5.Diamond P. (1987). ‘Consumer Differences and Prices in a Search Model’ Quarterly Journal of Economics, 102, 429-436.

6.Friedman, M. (1969) ‘The Optimum Quantity of Money.’ in the Optimum Quantity of Money and Other Assets. Chicago Aldine Publishing Co., 1-50

7.Frisch, R. (1959) ‘A Complete Scheme for Computing All Direct and Cross Demand Elasticities in a Model with Many Sectors’ Econometrica, 27 (2), 177-196.

8.Leibenstein, H. (1950). ‘Bandwagon, snob, and Veblen Effects in the theory of consumers' demand’ Quarterly Journal of Economics, 64, 183-207

9.Malakhov, S. (2011). 'Optimal Consumer Choices under Conditions of Sequential Search' Economic Policy ANE-IEP, Moscow, 6 (6), 148 - 168. (The English version is availaible as “Optimal Sequential Search and Optimal Consumption-Leisure Choice” at: http://works.bepress.com/sergey_malakhov

10.Malakhov, S. (2012b) ‘Satisficing Decision Procedure and Optimal Consumption-Leisure Choice’ Available at: http://works.bepress.com/sergey_malakhov

11.Malakhov, S. (2012c) ‘Veblen effect, Search for Status Goods, and Negative Utility of Conspicuous Leisure’ Journal Of Institutional Studies, 4 (3), 6-21 (The English version is availaible at: http://works.bepress.com/sergey_malakhov

12.Stigler, G. (1961) ‘The Economics of Information.’ Journal of Political Economy, 69(3), 213-225.

13.Stiglitz, J.E.(1979). ‘Equilibrium in Product Markets with Imperfect Information’ American Economic Review, 69(2), 339-345.