Chapter7 - p 1 y 1 p 2 y 2 we say that x 1,x 2 is directly...

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Chapter 7 - Revealed Preference 1. Motivation (a) up until now we’ve started with preference and then described behavior (b) revealed preference is “working backwards” - start with behavior and describe preferences (c) recovering preferences - how to use observed choices to “estimate” the indif- ference curves 2. Basic idea (a) if ( x 1 , x 2 ) is chosen when ( y 1 , y 2 ) is affordable, then we know that ( x 1 , x 2 ) is at least as good as ( y 1 , y 2 ) (b) in equations: if ( x 1 , x 2 ) is chosen when prices are ( p 1 , p 2 ) and p 1 x 1 + p 2 x 2 p 1 y 1 + p 2 y 2 , then ( x 1 , x 2 ) ( y 1 , y 2 ) (c) see figure 7.1. in the textbook (d) if p 1 x 1 + p 2
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Unformatted text preview: p 1 y 1 + p 2 y 2 , we say that ( x 1 ,x 2 ) is directly revealed pre-ferred to ( y 1 ,y 2 ) (e) if X is directly revealed preferred to Y , and Y is directly revealed preferred to Z (etc.), then we say that X is indirectly revealed preferred to Z (see figure 7.2. in the textbook) (f) the “chains” of revealed preference can give us a lot of information about the preferences (see figure 7.3. in the textbook) (g) the information revealed about tastes by choices can be used in formulating economic policy 1...
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