Smooth indifference sets (Q2277352)

The paper explores the consequences of a notion of preference smoothness weaker than the one investigated by \textit{G. Debreu} [Econometrica 40, 603-615 (1972; Zbl 0258.90007)]. Whereas Debreu's concept involves the differentiability of the utility function (implying the smoothness of the entire indifference graph), the author uses the concept of ``weakly smooth'' preference orderings, where smoothness is only required of individual indifference sets (so that each indifference set is a smooth manifold, but indifference sets do not necessarily ``vary smoothly''). The two concepts are equivalent only in special cases, e.g. when the utility function is homothetic. Continuity, monotonicity, and weak smoothness imply the existence of marginal rates of substitution, but not the differentiability of the utility function itself. However, a ``surrogate utility function'' can be constructed so that the marginal rates of substitution are ratios of surrogate marginal utilities. The consumer demand functions can then be obtained from the marginal rates of substitution in the usual manner (an interior solution is always assumed). Continuity, monotonicity, strict convexity, weak smoothness, and nonzero Gaussian curvature are shown to imply the differentiability of the Hicksian demand functions, hence the existence of the Slutsky substitution matrix.