Theory of revealed preference, Microeconomics


If consumer's taste and preferences do  not change, then observation of her market behaviour or, actual act of choice between the commodity sets reveals her preference. The above statement is the basis of the revealed preference theory. 

We will show that although revealed preference theory have no concept of utility function like indifference curve approach, it still preserves all the main results of the consumer behaviour theory. Just like in the indifference curve approach, substitution effect is negative in this theory and also consumer is free from money illusion i.e., the demand will remain unchanged if prices of all goods and money income change proportionately. Under this theory, the slope of the ordinary demand curve can take any algebrical sign, which is also consistent with the indifference curve approach.  

Given a price income substitution, if a consumer buys a collection of goods A, rather than an available collection B, and if B is not more expensive than A, then A has been revealed preferred to B. Let pA = (p1A, p2A,..., pnA) be the set of prices at which the individual buys collection A = (x1A, x2A,..., xnA) and spurns B = (x1B, x2B,..., xnB). Then A is revealed preferred to B, if it is at least as expensive as B at the prices pA at which A is purchased, i.e., if the following holds,

993_THEORY OF REVEALED PREFERENCE1.png where right hand sum represents the cost of collection B at the prices pA at which in fact A was purchased.   



In a two-commodity framework, price and income are given by (p1, p2, M) and represented by price line pp'. Any other point on pp', such as B is just as expensive as A because they both are on the same budget line. Every point such as B1 below the price line represents smaller amounts of both commodities than do some points on pp'; such lower points are cheaper than A.  

Therefore, because consumer bought A rather than any of these collections that were no more expensive, it follows that every point on or, below pp' is revealed inferior to A. Any point above pp' is more expensive than A. None of such points like B2, can be revealed inferior to A by consumer's purchase of A.  



Posted Date: 10/26/2012 3:36:15 AM | Location : United States

Related Discussions:- Theory of revealed preference, Assignment Help, Ask Question on Theory of revealed preference, Get Answer, Expert's Help, Theory of revealed preference Discussions

Write discussion on Theory of revealed preference
Your posts are moderated
Related Questions
Use two market diagrams to explain how an increase in state subsidies to public colleges might affect tuition and enrollments in both public and private colleges.

Discuss the costs and benefits of establishing a common currency. So, there is a convergence issue in setting up the common currency - and there will also be a convergence prob

Mixed Economy: This type of economic system combines the features of both the capitalist and socialist economic systems. The private sector is allowed to function on the principles

1. What is simultaneous biases? Discuss the cause of ednoginity in regression analysis. 2. Explains concisely what is meant by ' the identification problem'' in the context of l

what are the properties of indifference curve

Question: (a) With the help of diagrams, explain how the price and quantity demanded or supplied of fuel will change under the different scenarios: (i) Consumers expect a fu

illustrate graphically the influence of an increase in immigrants on the market supply of labour

You have decided to sell some goods at a local music festival. You have hired a sales stand for $500. Your cost per item is $3 and you will sell each item for $5. When you did your

how does utility figure in the analysis of consumer demand

discuss the revealed preference theory of consumer behaviour