Chapter 103 Utility Maximization

A testable form of the utility hypothesis results from identifying necessary condition(s) for the existence of a utility function that rationalizes the price and quantity data, meaning a utility function that correctly predicts choices that do not violate an agent's budget constraint. Possible inconsistencies with utility-maximizing choices are of no clear economic interest unless the objects of choice are scarce. In order for the chosen commodities to be scarce, the agent's budget constraint must be binding. Hence, a specific testable form of the utility hypothesis must incorporate scarcity. There are various ways to incorporate scarcity in the model of the utility-maximizing agent. The model of the utility-maximizing agent is central to theoretical and applied economics and to economics education. But how can one test for the presence of utility maximization? More specifically, how can one test the utility hypothesis, defined as the hypothesis that real economic agents behave as if they maximize utility functions subject to binding budget constraints?