601-t1-10fa

601-t1-10fa - E 601 1 Test 1 Thursday 7th October 2010...

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frqrplfv 601 1 Test 1 Thursday 7th October 2010 Answer all questions. Each is worth 10 marks. 1. What do the two main approaches to consumer behaviour in economics – the choice-based approach and the preference-based approach – have in common and how do they di f er? Does the preference-based approach imply the choice-based approach? If this is true, prove it; if it is false, give a counterexample. ANSWER The choice-based approach is founded on the weak axiom of revealed preference; thep re fe rence -ba sedapp roachi sfoundedonp re fe rencere la t ion s . A sDea tonand Muellbauer (1980) emphasize, both approaches assume standard budget constraints in R n + and therefore are consistent with the implications of imposing such budget constraints. These include Walras’s Law For all p 1 > 0 ,p 2 > 0 ,w 0 ,p 1 x 1 ( p 1 ,p 2 ,w )+ p 2 x 2 ( p 1 ,p 2 ,w )= w Homogeneity For all α > 0 ,p 1 > 0 ,p 2 > 0 ,w 0 x j ( α p 1 , α p 2 , α w )= x j ( p 1 ,p 2 ,w ) . The CB approach assumes the consumer’s choices are consistent with the weak axiom. The PB approach assumes the consumer’s choices obey the many assumptions imposed on preference relations (re f exivity, completeness, transitivity, continuity, monotonicity or local non-satiation, convexity, etc.). What could it mean to say that the preference-based approach implies the choice- based approach? Well, the restictions implied by budget constraints are common to both approaches so suppose B is a set of budget sets contained in the choice set X and each budget set has at least one element that is the best from the consumer’s point of view. And suppose ±
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601-t1-10fa - E 601 1 Test 1 Thursday 7th October 2010...

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