topic3_consumer behaviorII

The heterogeneity of preferences and income levels

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Unformatted text preview: Kagel and Kogut (1991) AER paper (supplementary reading posted on LMS) (supplementary reading posted on LMS). • The heterogeneity of preferences and income levels across individuals makes it extremely unlikely at the across individuals makes it extremely unlikely at the market level. 25 Ordinary and Compensated Demand Curves Ordinary and Compensated Demand Curves 1. Marshallian (or ordinary) Demand curves – Trace total price effect 2. Hicksian (or compensated) Demand curves compensated) Demand curves – Trace substitution effect only 26 Marshallian Marshallian Demand 1. Holds money income constant 2. Utility varies along the demand curve 3. Incorporates both income and substitution effects 4. Slopes down, but theoretically could slope up 27 Hicksian Hicksian Demand 1. Holds utility constant 2. Money income varies along the demand curve 3. Incorporates only the substitution effect 4. Always slopes down 28 Marshallian and Hicksian Demand Curves Price of X Price of X Px’ Px’ Px Px Inc Inc Sub DH X’ DM X DH DM Sub XCV XCV X0 X’ X0 • When X is norma...
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