New Upcoming Legal Jobs Free Workshop March 11 at 5 PM. Register here

    Question

    An indirect utility function

    A is defined over income and prices Correct Answer Incorrect Answer
    B assumes profit maximization Correct Answer Incorrect Answer
    C is homogenous of degree one Correct Answer Incorrect Answer
    D satisfies all of the above Correct Answer Incorrect Answer

    Solution

    Characteristics of the Indirect Utility Function: 1.      Defined over income and prices : o    The indirect utility function is expressed as V(p,m), where p is a vector of prices and m is the consumer's income. 2.      Assumes profit maximization : o    This statement is not directly applicable to the indirect utility function. Profit maximization is more relevant to firms than consumers. Consumers aim to maximize utility, not profit. 3.      Homogeneous of degree zero : o    The correct characteristic related to homogeneity is that the indirect utility function is homogeneous of degree zero in prices and income. This means that if all prices and income are scaled by the same positive factor, the utility remains unchanged: V(λp,λm)=V(p,y) for any λ>0   Given the provided options, the correct statement is: (a) is defined over income and prices While option (c) incorrectly states that the indirect utility function is homogeneous of degree one, it is actually homogeneous of degree zero.

    Practice Next