The maximum utility level a consumer can achieve expressed as a function of prices and income. Consider a consumer choosing the quantities x1 and x2 of two goods to maximize utility subject to a budget constraint. The utility maximization problem is
The solution is described by the two Marshallian demand functions x1 = d1(p1, p2, M) and x2 = d2(p1, p2, M). Substituting the optimal choices back into the utility function gives the maximized level of utility as
The function V(p1, p2, M) is the indirect utility function. Denote the marginal utility of income by α. Roy’s identity states that ∂V/∂pi = −αxi, a result that is useful for calculating the welfare consequences of a price change. See also expenditure function.