In this paper we distinguish two ‘dimensions’ of the utility concept. The first is the ‘behavioral’ dimension, described by indifference curves in a commodity space. It may be estimated by observing consumer purchase behavior. The second dimension is the ‘welfare’ dimension, i.e., the cardinal utility levels corresponding to indifference curves. The second dimension may be estimated by means of the income evaluation approach.
We deal with methodological issues and show by means of empirical evidence the validity of the income evaluation approach. In the same time we propose some major modifications of the method. Secondly, we show how the two dimensions may be combined. This is illustrated with respect to the AIDS and the Translog model. In this way we find how price and income variations influence measured individual welfare.
Van Praag, B. M. (1991). Ordinal and cardinal utility: an integration of the two dimensions of the welfare concept. Journal of econometrics, 50(1-2), 69-89.