Induced preferences and the theory of the consumer (Q790697)

Lancaster's theory of consumption where consumers have preferences over characteristics is a special case of a more general theory of induced preferences. This paper considers the structure of induced preferences and discusses various applications of this concept. Consider a consumer who has a non-empty, attainable consumption set \(X\subset A\), where A is a topological space. There is a set of traded goods \(Z\subset {\mathbb{R}}^ n\) available to the consumer. Finally, there is a technology correspondence H:\(Z\to X\). Induced preferences are represented by the utility function \(u^*(z)=\max \{u(x)| x\in H(z)\}\) with \(x\in X\) and \(z\in Z\). Among other things, sufficient conditions for (a) existence, (b) continuity, (c) (quasi) concavity, (d) homotheticity of the utility function \(u^*:Z\to {\mathbb{R}}\) are given. Furthermore, it is shown that if \(u^*\) is upper semi-continuous and strictly quasi-concave on compact Z, then the income-compensated demand function in the traded goods space has a non-positive slope. The second half of the paper discusses applications of induced preferences to Hicks' ''composite good'' theorem, portfolio theory, and the theory of optimal growth.