Notes-07_Revealed-Preferences-1 - Econ 3130 Fall 2011 R...

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Econ 3130, Fall 2011, R. Masson Chapter 7: p. 1 Chapter 7: Revealed Preferences I. My Biases A. I will not spend any time on this topic. 1. Note that in Varian at p. xxi he charts importance of chapter topics and Revealed Preference is in his “optional” column. 2. I will have no problem sets or exam questions on this topic 3. Varian mentions Revealed Preference a few times later in the text, but it is not required in any later chapters. 4. The “Notes” here are simply for interested students and those thinking about Graduate Study in Economics 5. The intuition is simple, following the choice axioms presented at pages 34-36 in Chapter 3 a. Recall the axioms, Complete ordering of preferences, Reflexivity of preferences and Transitivity of preferences, this chapter simply looks at these preference orderings in light of having developed the budget set (not just the budget line) B. Note, this will make it even more obvious that what we are generally talking about is Choice Theory rather than Preferences or Utility 1. But the conventional terminology is to refer to a Choice of one thing over another as that thing being “Preferred” to the other, which is why this is called Revealed Preferences rather than Revealing Choice Mechanisms C. Chapter 7 and everything beyond this point in the Notes is optional! 1. One caveat: The intuition for why there are no perfect price indices for describing inflation or allocating to Social Security benefits may be useful in the future for evaluating political debates involving concepts of inflation. That is a short topic following the Revealed Preferences material.
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Econ 3130, Fall 2011, R. Masson Chapter 7: p. 2 II. The Idea A. For simplicity of exposition only , suppose strictly convex preferences 1. I.e., convex indifference curves a. Hence, for a given set of prices, a unique “max” point B. Also for ease of exposition , assume no corner solutions C. Simply stated 1. Direct Revealed Preference a. If an individual selects {x 1 ,x 2 } when {y 1 ,y 2 } is feasible (in the budget set) then {x 1 ,x 2 } is revealed [to be] preferred to {y 1 ,y 2 } (1) Note the notation! (a) In Varian, for this chapter, he looks at two goods, x
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Notes-07_Revealed-Preferences-1 - Econ 3130 Fall 2011 R...

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