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Unformatted text preview: Separable Preferences—Ted Bergstrom, UCSB When applied economists want to focus their attention on a single commodity or on one commodity group, they often find it convenient to work with a two commodity model, where the two commodities are the commodity that they want to study and a composite commodity called ”other goods”. For example, someone interested in the economics of nutrition may wish to work with a model where one commodity is an aggregate commodity “food” and the other is “other goods.” To do so, they need to determine which goods are foods and which are not and then define the quantity of the aggregate commodity, food, as some function of the quantities of each of the food goods. In the standard economic model of intertemporal choice model of intertem poral choice, commodities are distinguished not only by their physical attributes, but also by the date at which they are consumed. In this model, if there are T time periods, and n undated commodities, then the total number of dated commodities is nT . Macroeconomic studies that focus on savings and invest ment decisions often assume that there is just one “aggregate good” consumed in each time period and that the only nontrivial consumer decisions concern the time path of consumption of this single good. In these examples, and in many other applications of economics, the tactic of reducing the number of commodities by aggregation can make difficult problems much more manageable. In general, such simplifications can only be purchased at the cost of realism. Here we examine the “separability conditions” that must hold if this aggregation is legitimate. To pursue the food example, suppose that the set of n commodities can be partitioned into two groups, foods and nonfoods. Let there be m food com modities. Let us write commodity vectors in the form x = ( x F ,x ∼ F ) where x F is a vector listing quantities of each of the food goods and x ∼ F is a vector quan tities of each of the nonfood goods. Suppose that a consumer has preferences representable by a utility function u of the special functional form u ( x F ,x ∼ F ) = U * ( f ( x F ) ,x ∼ F ) f is a realvalued function of m variables and where U * is a strictly increasing function of its first argument. The function f is our measure of the amount of the aggregate commodity food. We notice that the function u is a function of n variables, while U * is an function of n m +1 variables, which denote quantities of each of the nonfood variables and a quantity of the food aggregate f . Economists’ standard general model of intertemporal choice, is based on the use of dated commodities. Thus if there are n “undated commodities,” and T time periods, we define x it to be the quantity of commodity i consumed in period t . We define x t to be the nvector of commodities consumed in period t and we define x = ( x 1 ,...,x T ) to be the nTvector listing consumption of each good in each period. This is sometimes called a time profile of consumption.good in each period....
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This note was uploaded on 02/01/2011 for the course ECONOMY 6 taught by Professor Fallahi during the Spring '10 term at Cambridge.
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