Introduction

In Chapter 2 we placed considerable emphasis on the role that the marginal utility of money or integrating factor plays as the linchpin between consumer preferences and the associated system of demand functions. Of particular importance was the result that there exists a particular form for this integrating factor such that the underlying preference function can be expressed in the form of a money-metric. In this chapter we exploit this linkage in order to develop some simple, operational procedures for calculating this metric directly from the consumer demand functions. These methods will be seen to be direct descendents of the approach we developed earlier (McKenzie and Pearce, 1976). In Appendix 3.1 at the end of this chapter, a computer program is provided that will enable us to approximate the money-metric to a high degree of accuracy.

Virtually all the difficulties that plague economists working in this area could be avoided if it were possible to adopt the approach that econometricians have used to formulate complete, estimatable demand systems. In general, researchers in this area start by assuming a preference function and then deriving the associated demand systems. More recently, Deaton (1978), Muellbauer (1976), and Deaton and Muellbauer (1980) have begun directly with the cost-of-utility function and used this as a basis for constructing the demand relationships.