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In economics, a consumer's indirect utility function
$v(p,\; w)$ gives the consumer's maximal utility when faced with a price level $p$ and an amount of income $w$. It represents the consumer's preferences over 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 $v(p,\; w)$ can be computed from its utility function $u(x)$ by first computing the most preferred bundle $x(p,\; w)$ by solving the utility maximization problem; and second, computing the utility $u(x(p,\; w))$ the consumer derives from that bundle. The indirect utility function for consumers is analogous to the profit function for firms.

Formally, the indirect utility function is:

- Non-increasing in prices, because an increase in prices cannot open up an available bundle that would provide more utility;
- Non-decreasing in income, because when income rises, at worst you could consume the same bundle;
- 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).

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Last updated on Thursday October 09, 2008 at 02:57:01 PDT (GMT -0700)

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This article is licensed under the GNU Free Documentation License.

Last updated on Thursday October 09, 2008 at 02:57:01 PDT (GMT -0700)

View this article at Wikipedia.org - Edit this article at Wikipedia.org - Donate to the Wikimedia Foundation

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