Revealed Favorability and Indirect Utility: A Modern Approach

This chapter studies the axiomatic foundations of the indirect utility function, based on a revealed preference approach a la Paul A. Samuelson. We look at a chain of comparisons of budgets as if it gives a relation on the normalized-price space (namely, a revealed favorability relation) rather than a relation on the commodity space (namely, a revealed preference relation). In analogy to the weak and strong axioms of revealed preference, the weak and strong axioms of revealed favorability are newly introduced, and a fundamental theorem concerning the relationship between the latter two axioms is established. Then, the indirect and direct utility functions are effectively derived on the basis of the strong axiom of revealed favorability. It is noted that neither the continuity of the demand function nor the convexity of its range is required for the approach taken here.