The Extended Slutsky Equation Revisited

Abstract

This article, making standard assumptions, tests the effect that cross price elasticity of demand has on consumer (directly) and producer (indirectly) behaviour. Two classes of utility functions are employed: one is U = X⊃nY⊃m, which is asymptotically convex and, hence, conventional; another is U = X⊃n + Y⊃m, which is nonasymptotically convex and, therefore, unconventional. As a result, the rationally intended consumer of the conventional function behaves irrationally, questioning the marginal base of the analysis of the firm. The irrationally contemplating consumer of the unconventional function acts rationally, upholding such marginal analysis. Thus, the validity of the direct relation between intentions and actions is doubted.

Citation

Raiklin, E. (1990), "The Extended Slutsky Equation Revisited", International Journal of Social Economics, Vol. 17 No. 10, pp. 22-27. https://doi.org/10.1108/EUM0000000000458