A Theory of the Perturbed Consumer with General Budgets

We consider demand systems for utility-maximizing consumers facing general budget constraints whose utilities are perturbed by additive linear shifts in marginal utilities. Budgets are required to be compact but are not required to be convex. We define demand generating functions (DGF) whose subgradients with respect to these perturbations are convex hulls of the utility-maximizing demands. We give necessary as well as sufficient conditions for DGF to be consistent with utility maximization, and establish under quite general conditions that utility-maximizing demands are almost everywhere single-valued and smooth in their arguments. We also give sufficient conditions for integrability of perturbed demand. Our analysis provides a foundation for applications of consumer theory to problems with nonlinear budget constraints. Daniel L. McFadden University of California, Berkeley Department of Economics 549 Evans Hall #3880 Berkeley, CA 94720-3880 and NBER [email protected] Mogens Fosgerau Technical University of Denmark Bygningstorvet 116B Building , room 115C 2800 Kgs. Lyngby Denmark [email protected]