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
Direct preference revelation Suppose that the bundle x"is chosen when the bundle y is affordable Then x is revealed directly as preferred to y(otherwise would have been chosen) x直接显示偏好于
Direct Preference Revelation Suppose that the bundle x* is chosen when the bundle y is affordable. Then x* is revealed directly as preferred to y (otherwise y would have been chosen). x*直接显示偏好于
Direct preference revelation The chosen bundle x is revealed directly as preferred to the bundles y and z. X y X1
Direct Preference Revelation x2 x1 x * y The chosen bundle x* is revealed directly as preferred to the bundles y and z. z
Direct preference revelation That x is revealed directly as preferred to y will be written as x≥y
Direct Preference Revelation That x is revealed directly as preferred to y will be written as x y. D p
Indirect preference revelation Suppose x is revealed directly preferred to y, and y is revealed directly preferred to z. Then, by transitivity, x is revealed indirectly as preferred to z. Write this as so xy and y 6
Indirect Preference Revelation Suppose x is revealed directly preferred to y, and y is revealed directly preferred to z. Then, by transitivity, x is revealed indirectly as preferred to z. Write this as x z so x y and y z x z. D p D p I p I p
Indirect preference revelation X2 z is not affordable when x* is chosen X
Indirect Preference Revelation x2 x1 x* z z is not affordable when x* is chosen