Consumer Behavior and Quantity Constraints: Some Implications for Monetary Theory

Abstract

The critical assumption of the standard Walrasian exchange economy is, as Robert Clower and Axel Leijonhufvud point out, that each individual transactor, even though he is a price taker, believes that he will be able to realize his desired transaction quantities at the prevailing prices. The possibility that individuals may not be able to realize their desired transaction quantities has formed the basis of some current work on monetary disequilibrium-particularly that on constrained consumer behavior, or the dual-decision hypothesis (see [2, 5, 11, 15, 19, 20] ). Additionally, the dual decision hypothesis has been advanced as the theoretical rationale for the Keynesian consumption function. The purpose of this paper is to examine formally the behavior of an individual transactor when the Walrasian conditions are not fulfilled and he faces quantity constraints on his purchases and sales in an exchange economy with money. In the f1rst section of this paper we state the utility maximization problem of the individual when he faces quantity constraints and derive the partial derivatives of his constrained demand functions for commodities and money. In the second section, we present the implications of our analysis for the dual decision hypothesis. Our analysis indicates that only in a special case does the presence of quantity constraints