Theory of revealed preference, Microeconomics

Assignment Help:

THEORY OF REVEALED PREFERENCE:

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.   

 

1578_THEORY OF REVEALED PREFERENCE.png

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.  

 

 


Related Discussions:- Theory of revealed preference

Privatisation of the economy:, Privatisation of the Economy: Privatisa...

Privatisation of the Economy: Privatisation has to be viewed in two ways: In a narrow sense, it implies the induction of private ownership in a public sector undertaking. In a

Cost-benefit analysis, Normal 0 false false false EN-IN...

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

Design process, The outer shape of a football can be described via the foll...

The outer shape of a football can be described via the following equation               Using Matlab, plot the outer shape of a football in  red or orange using a line widt

Aggregate supply curve for entire economy, 1. Explain how the aggregate sup...

1. Explain how the aggregate supply curve for the entire economy can be derived under; i. Classical assumption ii. Keynesian assumption 2. Explain how equilibrium can be a

Labour supply, Labour Supply:Total number of workers available and willing ...

Labour Supply:Total number of workers available and willing to work in a paid position; generally measured by the labour force(even though the labour force usually excludes many wo

Compute marginal cost and average total cost, 1.  What is the relationship ...

1.  What is the relationship between a firm's total revenue, profit and total cost? Give an example of hypothetical data and draw the curves. 2.  Define economies of scale and e

Gross domestic product (gdp), Determine whether the ff is counted as part o...

Determine whether the ff is counted as part of gdp which of the ff statement are included or excluded 1.1A monthly cheque received by an economic stu

Discount rate, Discount Rate The term discount rate relates to ...

Discount Rate The term discount rate relates to business valuations. It is the rate applied to a future torrent of making an income or cash flow to measure its represen

Analyse the strengths and weaknesses of gdp, Analyse the strengths and weak...

Analyse the strengths and weaknesses of GDP as a measurement. Answer Strengths of GDP as a measurement 1) It helps in making international comparison among different

Employee ownership stock plan (esop), A trust is build to acquire shares in...

A trust is build to acquire shares in organizations for subsequent allocation to employees over time by time.

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd