The Strong Law of Demand

Donald Brown () and Caterina Calsamiglia

Yale School of Management Working Papers from Yale School of Management

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: 2004-07-28
New Economics Papers: this item is included in nep-mic
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Citations: View citations in EconPapers (7)

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Working Paper: The Strong Law of Demand (2003)
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