401-t1-10wa

401-t1-10wa - E 401 1 Test 1 Tuesday 26th January 2010...

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E frqrplfv 401 1 Test 1 Tuesday 26th January 2010 Answer all questions. Each is worth 10 marks. 1. What are the two main approaches to consumer behaviour in economics? What elements do they have in common, and how do they di f er? What restrictions do they place on a two-good demand system x 1 ( p 1 ,p 2 ,w ) x 2 ( p 1 2 ) ? ANSWER The two approaches are the choice-based approach and the preference-based ap- proach. The f rst is founded on the weak axiom of revealed preference; the second on preference relations. Both approaches assume standard budget constraints in R n + and therefore are consistent with the implications of imposing such budget con- straints. The CB approach assumes the consumer’s choices are consistent with the weak axim. The PB approach assumes the consumer’s choices obey the many as- sumptions imposed on preferences relations (re F exivity, completeness, transitivity, continuity, monotonicity or local non-satiation, convexity, etc.). The restrictions on the demand system include the following. Walras’s Law p 1 x 1 ( p 1 2 )+ p 2 x 2 ( p 1 2 )= w Homogeneity for all α > 0 ,x 1 ( α p 1 , α p 2 , α w x 1 ( p 1 2 ) 2. Let X be a choice set and ( B ,C ( · )) be a choice structure on X . (a) Using mathematics, de f ne the weak axiom of revealed preference (WARP).
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E frqrplfv 401 2 ANSWER (*) Assume B 1 B ,B 2 B , { a, b } B 1 , { a, b } B 2 then a C ( B 1 ) ,b C ( B 2 ) a C ( B 2 ) .
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401-t1-10wa - E 401 1 Test 1 Tuesday 26th January 2010...

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