A consumer is observed choosing the bundle (3, 1) at prices (1, 2) and the bundle (2, 2) at prices (2,1). Her wealth is unknown and may be different for the two choices. (a) Assuming the consumer spends all of her wealth, are her choices consistent with the Weak Axiom of Revealed Preference (or is it impossible to determine)? Solution: At prices (1,2), the first bundle costs 5 and the second costs 6. At prices (2,1), the first bundle costs 7 and the second costs 6. Therefore, neither is revealed preferred to the other, which implies that the choices are consistent with WARP. (b) If the consumer may not be spending all of her wealth, are her choices consistent with the Weak Axiom of Revealed Preference (or is it impossible to determine)? Solution: If the consumer's wealth is high enough that both bundles are affordable at both prices then WARP is violated. Therefore, it is impossible to determine.

A consumer is observed choosing the bundle (3, 1) at prices (1, 2) and the bundle (2, 2) at prices (2,1). Her wealth is unknown and may be different for the two choices. (a) Assuming the consumer spends all of her wealth, are her choices consistent with the Weak Axiom of Revealed Preference (or is it impossible to determine)? Solution: At prices (1,2), the first bundle costs 5 and the second costs 6. At prices (2,1), the first bundle costs 7 and the second costs 6. Therefore, neither is revealed preferred to the other, which implies that the choices are consistent with WARP. (b) If the consumer may not be spending all of her wealth, are her choices consistent with the Weak Axiom of Revealed Preference (or is it impossible to determine)? Solution: If the consumer's wealth is high enough that both bundles are affordable at both prices then WARP is violated. Therefore, it is impossible to determine.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter3: Preferences And Utility

Section: Chapter Questions

Problem 3.9P

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