The Consumer Consumption Conundrum : An Explanation

This paper uses the Fourier flexible form to jointly approximate utility and service flows from durable and nondurable goods. In contrast, parametric functions are usually not flexible enough to accurately approximate nonseparability and often give inconsistent results. This paper calls these inconsistent results the consumer consumption conundrum. I calculate Morishima elasticities of substitution because Blackorby and Russell (1989) show that the Allen-Uzawa measure of substitution is incorrect. Results show that substitution into commodities are variable over time. Therefore, policy intended to affect consumption should take the variability of substitution into account because constant elasticity of substitution functions may give misleading conclusions