The Strong Law of Demand

Donald Brown () and Caterina Calsamiglia ()

No 1399, Cowles Foundation Discussion Papers from Cowles Foundation, Yale University

Abstract: We show that a demand function is derived from maximizing a quasilinear utility function subject to a budget constraint if and only if the demand function is cyclically monotone. On finite data sets consisting of pairs of market prices and consumption vectors, this result is equivalent to a solution of the Afriat inequalities where all the marginal utilities of income are equal. We explore the implications of these results for maximization of a random quasilinear utility function subject to a budget constraint and for representative agent general equilibrium models. The duality theory for cyclically monotone demand is developed using the Legendre-Fenchel transform. In this setting, a consumer's surplus is measured by the conjugate of her utility function.

Keywords: Permanent income hypothesis; Afriat's theorem; Law of demand; Consumer's surplus; Testable restrictions (search for similar items in EconPapers)
JEL-codes: D11 D12 D51 (search for similar items in EconPapers)
Date: 2003-02
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Working Paper: The Strong Law of Demand (2004)
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