New Thoughts About Inferior Goods
When we combine assumptions that the utility function is additive and that one commodity is an inferior good (defined as one for which purchases decrease as income increases), we produce a case in which there are n-i inferior goods, each of which has diminishing marginal utility, and one normal commodity (defined as one for which purchases increase as money income increases), which has increasing marginal utility. This result is of considerable general interest. It provides an analytical method of evaluating the results of empirical studies of demand based upon additive utility functions written for blocks of commodities [2] [4] [7]. Unless such empirical studies produce a result in which all income elasticities are positive, they must produce a result in which there are n-i negative income elasticities and one positive income elasticity. In addition to the general demonstration mentioned above, this paper also presents what is apparently the first published specific utility function, together with its associated demand functions to illustrate the case of a commodity with a negatively sloping income consumption curve. This specific (additive) utility function can be subjected to a monotonic transformation by squaring it; such a transformation leaves the demand functions unchanged and, in our case, will produce an illustration of the case of an inferior good based on an assumption of dependence of the marginal utilities. I turn first to the general demonstration that the combined assumptions: (1) that the utility function is additive, and (2) that one good is inferior, imply that there are n-1 inferior goods (all with diminishing marginal utility) and one normal commodity (with increasing marginal utility). Assume the existence of a consumer with a utility function of the form: