When first presenting the utility function and its arguments, textbooks typically start by stating that utility is a function of consumption and leisure. See for example https://sites.hks.harvard.edu/fs/gborjas/publications/books/LE/LEChapter2.pdf.

On the other hand, some consider that the utility is a function of income and leisure, and claim that this is more familiar than if the utility was a function of consumption and leisure. See for example https://www.jstor.org/stable/1911308?seq=1#page_scan_tab_contents.

What are the different motivations behind the two approaches? Which one is, or should be, the standard? What should be the reference point in determining the arguments of the utility function?

  • $\begingroup$ The paper in your second link also starts out by defining utility in terms of consumption and leisure. The authors switched to the "pseudo-utility function" of income and leisure so as to relate the problem to the "familiar income-leisure diagram". $\endgroup$ – Herr K. Jul 16 '19 at 17:13
  • $\begingroup$ Indeed. Therefore is my question. If income-leisure is more familiar, why not start with that from the outset? Or, why the textbook starts with consumption-leisure? Is there a specific reason to choose one over the other? $\endgroup$ – Snoopy Jul 16 '19 at 17:21
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    $\begingroup$ If an individual spends his entire income on consumption (ie no savings) and the price of consumption is 1, then the two approaches are equivalent. $\endgroup$ – Herr K. Jul 16 '19 at 17:55
  • $\begingroup$ OK. Would the following statements then be correct? 1. If consumption is sourced from different sources of income (labor income, savings, bequest), then the trade off of interest would be between consumption and leisure since it makes little sense to trade off leisure against a particular source of consumption. 2. If consumption is sourced from one source of income, it does not matter if leisure is traded off against consumption or the only source of income. $\endgroup$ – Snoopy Jul 16 '19 at 18:36
  • $\begingroup$ Yes, I think the two statements make sense. $\endgroup$ – Herr K. Jul 16 '19 at 21:13

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