IGNOU MEC 1 2016 2017 - What is indirect utility function? How will you derive an indirect uti

Question

What is indirect utility function? How will you derive an indirect utility function from a direct utility function? Explain Roy’s identity?

15 Mar 2017

Answer :

Word Count : 347

Let qi denotes commodity I and pi is the price of that commodity. Let y denotes money income of the consumer. Suppose vi = pi/y. The budget constraint written as:

n

1 =∑ viqi (1)

i=1

Since optimal solutions in the demand functions are homogeneous of degree zero in income and prices, nothing essential is lost by this transformation to ‘normalised’ prices. The utility function U = f(q1,qn) together with equation (1)

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