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Rubinstein2005-page87 - 12:18 master Sheet number 85 Page...

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October 21, 2005 12:18 master Sheet number 85 Page number 69 Choice over Budget Sets and the Dual Problem 69 The Consumer’s Indirect Utility Function Let us return to the consumer who chooses bundles from budget sets. He might be interested in formulating indirect preferences when choosing a market to live in or when assessing the effect of tax reforms (which cause changes in prices or wealth) on his welfare. Since a budget set is characterized by the K + 1 parameters ( p , w ) , the above approach leads to the definition of the indirect preferences on the set K + 1 ++ as ( p , w ) ( p , w ) if x ( p , w ) x ( p , w ) . Interpreting p in the standard manner, as prices prevailing in the market, defin- ing indirect preferences in this way precludes considerations such as, “I prefer to live in an area where alcohol is very expensive even though I drink a lot”. The following are basic properties of the indirect preferences , induced from the preferences on the bundle space. The first is
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