This preview shows pages 1–3. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: 1 ECON191 (Spring 2009) 23.3.2009 (Tutorial 4) Chapter 2 Consumer Theory (Chapter 3 & 4 of textbook) Revealed preference (i) Revealed preference Bundle X that the consumer chooses is revealed preferred to bundle Y, a bundle that he could have chosen. (ii) Weak axiom of revealed preference (WARP) If X is revealed preferred to Y, then Y will not be revealed preferred to X. (The diagram shows the violation of WARP) (iii) Strong axiom of revealed preference (SARP) If X is revealed preferred to Y, and Y is revealed preferred to Z, then Z will not be revealed preferred to X. ¡ If we know the choices a consumer has made, we can determine what their preferences are if we have information about a sufficient number of choices that are made when prices and incomes vary. ¡ The indifference curve must lie within the unshaded area A B X Y A B X Y (i) (ii) (iii) A B X Y Z 2 Expenditure function ¡ It identifies the minimum amount of income that allows a consumer to achieve a predetermined level of utility at given prices. Ö Expenditure function: ) , , ( 2 1 u p p e E = ¡ Utility maximization : Suppose prices are p 1 and p 2 , and income = W (within the economically feasible set), which bundle would we choose to maximize our utility? Ö The utility maximization: Max ) , ( 2 1 x x u s . t . 2 2 1 1 x p x p W + = ) , , ( 2 1 1 * 1 p p W x x = Æ Demand function ) , , ( 2 1 2 * 2 p p W x x = Æ Demand function ¡ Income (cost) minimization : Suppose prices are p 1 and p 2 , what is the minimum amount of income that allows us to reach u* ?...
View
Full
Document
This note was uploaded on 10/11/2009 for the course ECON 191 taught by Professor Chen during the Spring '08 term at HKUST.
 Spring '08
 Chen
 Microeconomics

Click to edit the document details