SIMPLE ANALYTICS OF PRODUCTIVE CONSUMPTION

Productive consumption adds to utility and income at the same time. Th e shadow price of a productive good is equal to its money price less i ts marginal product. As more of the good is consumed, its shadow price rises because of diminishing productivity, and the consumer's full in come also rises because the marginal product is positive. This paper u ses a simple method to derive the comparative statics of the demand sy stem when shadow prices and full income are endogenous. The direction of the overall bias induced by endogenous prices and income is found t o be determinate. We demonstrate that the demand for productive goods tends to be relatively unresponsive to exogenous changes in prices and income. We also show that labor supply will be relatively unresponsiv e to wage and unearned income if market work causes fatigue.