Ch04_revealed_preference_spr08_pam200

# Ch04_revealed_preference_spr08_pam200 - PAM 200...

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Unformatted text preview: PAM 200 Intermediate Microeconomics A. Sinan nr Consumer Choice Revealed Preference Chapter 4 Revealed Preference Theory We cannot know any individual's indifference map. However, we do observe choices made. Can we build a theory based only on observed choices? What might that theory look like? Particularly powerful if we observe bundles chosen at various price levels. Chapter 4 PAM 200 A. Sinan nr Revealed Preference Consumers always choose a bundle on the budget line. If consumer chooses (X, Y) when prices are PX and PY, then she spends PXX + PYY on the chosen bundle. She could have chosen any other bundle that cost the same amount. The fact that she chose this particular bundle means there was no other bundle that was affordable but provided more happiness. That is (X, Y) is said to be revealed preferred to any other affordable bundle at prices (PX, PY). Chapter 4 PAM 200 A. Sinan nr Revealed Preference Y B1 Suppose consumer chooses A given budget line B1, and chooses B given budget line B2. Are these choices consistent with preference maximization? B A B2 X Revealed Preference Y B1 C B To answer this, consider bundle C which gives the consumer more of both goods than B. Therefore, C must be better than B. But C is on B1 where the consumer chose A. Therefore A must be better than C (and better than B). But then, when the consumer chooses B, A is affordable. Given that A is affordable and revealed preferred to B, the consumer cannot be maximizing preferences by these choices. A B2 X ...
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Ch04_revealed_preference_spr08_pam200 - PAM 200...

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