III - Demand functions: particular restrictions

Abstract

This chapter discusses specifications leading to interesting and operational restrictions, capable of molding the available statistical data in a form that can easily be tested by current econometric methods and rejected by the same methods. The additivity assumption is defensible if the arguments of the utility function are taken to be broad aggregates of goods such as food, clothing, and housing rather than individual commodities. Additivity is indeed a cardinal property. The aggregates that appear as arguments in additive utility functions are groups of commodities. From an ordinal point of view, the demand equations have the advantage of being invariant under any monotonic increasing transformation. The use of the cross-substitution effect implies that all goods can be substitutes but not complements.