Introduction to Quasilinear Preferences

Parag Waknis

Ambedkar University Delhi

August 22, 2019

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 Overview

1 What are quasiliear preferences

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 Intuition

A special class of preferences where one good enters everyones’ utility

function in the same way- a simple additive term. For example, if the
special good is apples, then each person’s utility can be written as:

ui (everything) = vi (everything except apples) + apples

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 Intuition

In welfare economics, this allows us to measure a change in i’s utility

as an apple equivalent.
Things gets simplified even further if apples are measured in rupee
terms.
Change in i’s utility becomes rupee equivalent.
Makes interpersonal utility comparisons possible even when utility is
ordinal.
Good 2 is a ’real good’ and can be viewed as a composite of various
other things whose relative prices do not change.

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 Definition

In its general form, preferences that are quasilinear are written as follows:

u(x1 , x2 ) = v(x1 ) + x2

Here, v is an increasing and concave function of x1 and x2 enters as a

simple additive term.
The indifference curves take the form of

x2 = u(x1 , x2 ) − v(x1 )

They are just shifted versions of each other. The following graph gives the
representation of these preferences.

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 Quasilinear Indifference Curves

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 Quasilinear Indifference Curves

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 Demand with Quasilinear Preferences

Maximize u(x1 , x2 ) = v(x1 ) + x2

subject to: p1 x1 + p2 x2 = M

Solution:

p1
⇒ v′ (x1 ) =
p
( )2
p 1
⇒ x1 ∗ = v′−1
p2

Thus, demand for good x1 is independent of income.

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 Demand with Quasilinear Preferences

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 Additive Separability and Quasilinear Preferences

Utility functions that satisfy additive seperability of utiliy and linearity of

utility in money are referred to as “quasi-linear” utility functions.

Additive seperability of the utility function implies that:

the buyer’s utility from consuming a good is independent of the
amount of money that he pays for it.
the buyer’s disutility from money payments is independent of whether
or not he owns the good.

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 The End

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