HIERARCHICAL PREFERENCES AND CONSUMER CHOICE.

Abstract

This study considers the problem of the consumer in light of work presented by classical economists who discussed consumption. Richer assumptions about the tasks of an individual consumer and technology of consumption activities are used to develop a static model of consumer behavior. This model is extended through the introduction of opponent-process theory to develop a dynamic model which includes habit formation. Particular emphasis is placed in Chapter 2 upon the psychological underpinnings of consumption activities and the allocation of time aspect of these activities. It is assumed that a consumption activity is defined as a production function combining commodity and time inputs to produce satisfaction. Chapter 3 presents the framework over which preferences about different activities are defined. Preference relationships are assumed to be rational, transitive, and constant over time and location. In addition, satiation in a particular consumption activity is assumed to exist and the ranking over satiation states is defined. Chapter 4 deals with the behavior of a time and income constrained consumer who seeks to choose an optimal bundle of commodity and time inputs over the ordered activity set. The solution to this problem is characterized by affordable allocation of resources from the highest ranked down to the lowest ranked activity. Comparative statics results associated with this solution are considered for non-labor income, wage rate, and price changes. It is shown that besides the production substitution effects brought about by changes in the wage rate and in commodity prices, the net effect of changes in economic variables is predominantly at the lower end of the preference ordering. Chapter 5 presents both a psychological version of opponent-process theory and an economic interpretation of this theory which is used to describe habit dynamics. Chapter 6 combines the static consumer problem and the dynamic description of activity productions under habit formation to present an extended problem of a dynamic consumer behavior.