The Cost and Benefit of Consuming in Smaller Bundles

Abstract

Existing classical theory cannot explain consumer behavior of cutting consumption into smaller bundles instead of consuming everything in one bundle. We present a model that separates consumer behavior into two steps. At first, the consumer decides on the amount of working hours, which defines his income. In the second step, s/he decides on the number of consumption bundles. Since a consumer has larger utility when cutting consumption into smaller bundles, while on the other hand s/he faces higher costs when buying smaller bundles, s/he can take both factors into consideration when deciding on the optimal number of consumption bundles.