Thanks to visit codestin.com
Credit goes to www.scribd.com

Scribd
Upload
425 views2 pages

Roy Identity

Roy's Identity provides a means to obtain demand functions from indirect utility functions. It states that the derivative of indirect utility with respect to price equals the negative of the demand for that good. The document provides details on verifying Roy's Identity using the chain rule, constrained utility maximization, and the envelope theorem. It concludes that Roy's Identity allows deriving demand functions from indirect utility functions, which is often easier than directly estimating demand functions for each price and wealth combination.

Uploaded by

TAJAMULL AMEEN
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
425 views2 pages

Roy Identity

Roy's Identity provides a means to obtain demand functions from indirect utility functions. It states that the derivative of indirect utility with respect to price equals the negative of the demand for that good. The document provides details on verifying Roy's Identity using the chain rule, constrained utility maximization, and the envelope theorem. It concludes that Roy's Identity allows deriving demand functions from indirect utility functions, which is often easier than directly estimating demand functions for each price and wealth combination.

Uploaded by

TAJAMULL AMEEN
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Roy’s Identity

The Marshallian demand function x(p, w) implies Roy’s Identity:

,
, 1 .
,

Roy’s Identity provides a means of obtaining a demand function from an indirect utility function.
Notice that we have the demand function on the left of the equality and we differentiate the
indirect utility on the right side with respect to each of its arguments.

Verification of Roy’s Identity: Details


We will start our verification of this equality by working with the numerator on its right
side. First recall that changes in utility will be a function of the changes in the consumption of
each commodity xj. Invoking the Chain Rule to find the derivative of indirect utility with respect
to each price, we have:

, ,

Recall from our constrained maximization of U(p, w) that:

∂L ∂U
λp 0 for i 1 to n
∂x ∂x

which means that:

∂U
λp 0 for i 1 to n
∂x
and

λ p

Substituting in above, we have:

This provides with a restatement of the numerator of the right hand side of Roy’s Identity. Next,
consider the right side denominator of Roy’s Identity. The Envelope Theorem provides:
, ,

Substituting these into first the denominator and then the numerator of our statement of Roy’s
Identity leaves:

∑
, , 1 .

x(p, w) defines the consumer’s demand function, as we see next from Walra’s Law.
Recall that Walra’s Law states that total consumption expenditures must equal total
wealth:

If we differentiate both sides of this with respect to the price pi of commodity i, we obtain:

∑ ,
, 0

or:

This is our demand function.


Roy’s Identity, enables us to derive demand functions from the indirect utility functions.
In many cases this will be easier than directly estimating demand functions x(p, w). Estimating
Roy’s Identity requires estimation of a single equation while estimation of x(p, w) might require
an estimate of each value for p and w the solution to a set of n+1 first-order equations. This will
be applied in our derivation of the Slutsky Equation later.

You might also like