Question #279117

The demand function for a particular good in competitive market is given by y = a + bP. What are the associated direct and indirect utility functions?


1
Expert's answer
2021-12-13T10:23:28-0500

For the given function of demand  y=a+bpy=a+bp

 The function for "indirect utility" can be written as 

V(y,p,m)=maxu(y,z)V(y,p,m)=max u(y,z)

where, 

z=other goods

m=income/wealth

Indirect utility function=VpVm=−\frac{\frac{∂V}{∂p}}{\frac{∂V}{∂m}}

Indirect utility function=y(p,m)=y(p,m)


Thus, the consumer can only get as much utility as limited to the price and also to their income/wealth. 

Now, for the utility function of "direct" nature, 

U(y,z)=MinV(y,p,m)U(y,z)=Min V(y,p,m)



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