Chapter seven Revealled Preference
Chapter Seven Revealed Preference
Revealed Preference analysis Suppose we observe the demands (consumption choices) that a consumer makes for different budgets. This reveals information about the consumer's preferences We can use this information to
Revealed Preference Analysis Suppose we observe the demands (consumption choices) that a consumer makes for different budgets. This reveals information about the consumer’s preferences. We can use this information to
Revealed Preference analysis Test the behavioral hypothesis that a consumer chooses the most preferred bundle from those available Discover the consumers preference relation
Revealed Preference Analysis –Test the behavioral hypothesis that a consumer chooses the most preferred bundle from those available. –Discover the consumer’s preference relation
Assumptions on Preferences Preferences do not change while the choice data are gathered. are strictly convex are monotonic Together, convexity and monotonicity imply that the most preferred affordable bundle is unique
Assumptions on Preferences Preferences –do not change while the choice data are gathered. – are strictly convex. – are monotonic. Together, convexity and monotonicity imply that the most preferred affordable bundle is unique
Assumptions on Preferences If preferences are convex and monotonic(i.e well-behaved) then the most preferred affordable bundle is unique X1
Assumptions on Preferences x2 x1 x1 * x2 * If preferences are convex and monotonic (i.e. well-behaved) then the most preferred affordable bundle is unique