On the interaction of income and prices in consumer demand

Empirically measured positive quality elasticities led Cramer to suggest that an increase in real income will raise price elasticities. Cramer's conjecture calls for constraints on the consumer's preference structure. Our note offers two possible theoretical explanations of these observations, which result from optimizing models of consumer behavior available in the literature and require no restriction on the consumer utility index. An assumed positive relation between earnings and cost of time in consumption implies that the correlation between (pecuniary) price relatives and income elasticities is at least in part spurious. An assumed positive relation between earnings and the cost of time spent on "searching" for price information may explain the discrepancy between expenditure and quality elasticities with respect to income in cross-sectional analyses of demand for necessities. The note ends with suggestions for empirical to distinguish among the several theories.