ch3_example2

ch3_example2 - The first debit card was used to purchase...

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Tammy and Tad's father has given each of them a debit card and allows each of them to use the card to spend $500 each month. Tammy and Tad use their $500 to buy only CDs and gasoline. In February, the price of a CD was $10 and the price of gasoline was $1 per gallon. At these prices, Tammy purchased 45 CDs and 50 gallons of gas. Ted consumed 20 CDs and 300 gallons of gas. For the month of March, Tammy and Tad's father lost the records indicating who had which debit card. From the bank statement in March, their father learned that the price of a CD was $12 and a gallon of gas cost $0.80.
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Unformatted text preview: The first debit card was used to purchase 235 gallons of gas and 26 CDs. The second debit card was used to purchase 265 gallons of gas and 24 CDs. Using revealed preference theory, identify which card Tammy must possess. Solution: From the diagram, we see that point D is revealed preferred to point B. This implies that Tad would not choose to consume at point B. Thus, we know that Tad must have consumed at point C and has the second debit card. This means Tammy has the first debit card....
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