Microeconometric Analysis of Kink Points: The Convex Case

Abstract

Consumer demand and production microeconomic models with kink points are analyzed. Kink points in demand or production schedules may arise due to binding nonnegative constraints, quantity rationing, production quotas or increasing block prices. The occurrence of various kink points divides the schedule into various regimes with structural change. The switching conditions for the regimes can be determined by the comparison of market prices with some appropriate virtual prices. Several equivalent switching regime conditions are also derived in terms of demand functions. The proposed approach unifies the direct and dual approaches and suggests appropriate econometric models for convex budget sets in consumer demand and production economics.