Indirect utility function
In economics, a consumer's indirect utility function gives the consumer's maximal attainable utility when faced with a vector of goods prices and an amount of income . It reflects both the consumer's preferences and market conditions.
This function is called indirect because consumers usually think about their preferences in terms of what they consume rather than prices. A consumer's indirect utility can be computed from his or her utility function defined over vectors of quantities of consumable goods, by first computing the most preferred affordable bundle, represented by the vector by solving the utility maximization problem, and second, computing the utility the consumer derives from that bundle. The resulting indirect utility function is
The indirect utility function is:
- Continuous on Rn+ × R+ where n is the number of goods;
- Decreasing in prices;
- Strictly increasing in income;
- Homogenous with degree zero in prices and income; if prices and income are all multiplied by a given constant the same bundle of consumption represents a maximum, so optimal utility does not change;
- quasi-convex in (p,w).
Moreover, Roy's identity states that if v(p,w) is differentiable at and , then
Indirect utility and expenditure
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