True or false: Prices should never enter into the numerator of a simplified indirect utility function....

True or false: Prices should never enter into the numerator of a simplified indirect utility function. Explain.

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Expert Solution

The given statement is true.

A consumers indirect utility function v[p,w] gives the consumers maximal attainable utility when faces with a vector ‘p’ of goods prices and an amount of income ‘w’. It is a reflection of the consumers preferences and the market conditions. In this particular utility function, the consumers usually think about their preferences in terms of what they consume and not exactly in terms of the prices. This is one major feature why the function is considered as an indirect function and since the prices are not taken in to consideration in the direct method, it can be seen that the prices would never appear in the numerator of such a function. The indirect utility function is also continuous, decreasing in prices, strictly increasing in income quasi-convex in [p,w] and homogeneous with degree zero in the prices and income and hence the optimal utility doesn’t change.

Rahul Sunny answered 1 year ago

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