Consumption Decisions in Non-Strategic Environments
We begin by characterizing the space of elements that test an agent's ability to optimally allocate their limited resources to goods and services they desire. In economics and decision theory, the most primitive approach to describing the preferences of decision-makers is to use a function that maps a set of possible choices to the agent's optimal choice within that set. Under a set of intuitive assumptions, such as transitivity (i.e., if bundle X is preferred to bundle Y, and Y is preferred to bundle Z, then X must be preferred to Z), it becomes possible to “rationalize” preferences by instead describing a utility function. This function assigns a real number to each bundle, and the agent selects the bundle with the highest utility.
In this paper, we focus on these “rationalizable” preferences, where agent choice can be implemented as utility maximization constrained by prices and income. The solution to these consumer choice problems provides us with, among other things, individual demand functions, which describe the choice of each good or service as a function of prices and income. The individual demand functions for each good are essential when aggregating to the market demand in Consumer Goods Market Aggregation, which in turn is used to find the price in a non-strategic equilibrium. In addition, we test variations on the framework such as the agent's ability to make tradeoffs between the quantity of goods they would need to be able to purchase for an increase in the amount of work they provide for a given wage (i.e., the elasticity of labor supply), as well as cases of choice under uncertainty where the agent is choosing between possible lotteries under rationalizability assumptions required for von Neumann expected utility.
Modules
-
2.1Properties of Utility Functions
In this section, we test the ability of the agent to use utility functions as a means to compare preferences over different “bundles” of goods or services.
-
2.2Deriving Demand
The module in this section tests an agent's ability to solve a constrained utility maximization problem to derive a demand function—relying on the results of Properties of Utility Functions.
-
2.3Comparative Statics of Demand
This module considers how agents reason about changes in prices or income, and their effects on the quantity of each good they would purchase.
-
2.4Labor Supply
While the preceding elements tested tradeoffs in choices of bundles with different goods, services (in Deriving Demand and over lotteries in Dynamic Consumption Decisions), often agents need to make a choice trading off between leisure and consumption.
-
2.5Dynamic Consumption Decisions
Individuals often face decisions about how to trade off more consumption today at the cost of additional debt and less consumption in the future, and how best to plan for consumption with various contingencies when the future is uncertain.