Suppose that a consumer chooses (x1, x2) = (9,2) at prices (pi, p2) = (2,3) and (x,x) (4,5) at prices (pl, p) = (3,2) (note that wealth may be changing along with prices). As- suming that choices satisfy Walras' Law, i.e. the consumer spends her full wealth, are these choices consistent with the Weak Axiom of Revealed Preference? = Solution: The bundle x¹ is affordable at the old wealth wº = pº.x0 = 24 and prices pº, but the bundle xº is not affordable at the new wealth w¹ = p¹.x¹ 22 and prices p¹. This means that is revealed preferred to x¹, and x¹ is not revealed preferred to xº. Therefore, these choices are consistent with WARP.
Suppose that a consumer chooses (x1, x2) = (9,2) at prices (pi, p2) = (2,3) and (x,x) (4,5) at prices (pl, p) = (3,2) (note that wealth may be changing along with prices). As- suming that choices satisfy Walras' Law, i.e. the consumer spends her full wealth, are these choices consistent with the Weak Axiom of Revealed Preference? = Solution: The bundle x¹ is affordable at the old wealth wº = pº.x0 = 24 and prices pº, but the bundle xº is not affordable at the new wealth w¹ = p¹.x¹ 22 and prices p¹. This means that is revealed preferred to x¹, and x¹ is not revealed preferred to xº. Therefore, these choices are consistent with WARP.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose that a consumer chooses (x,x) (9,2) at prices (pi, p2) = (2,3) and (x,x)
(4,5) at prices (p1, p²) = (3,2) (note that wealth may be changing along with prices). As-
suming that choices satisfy Walras' Law, i.e. the consumer spends her full wealth, are these
choices consistent with the Weak Axiom of Revealed Preference?
=
=
Solution: The bundle x¹ is affordable at the old wealth wº = p⁰.xº = 24 and prices pº, but
the bundle xº is not affordable at the new wealth w¹ = p¹ x¹ = 22 and prices p¹. This means
that is revealed preferred to x¹, and x¹ is not revealed preferred to xrº. Therefore, these
choices are consistent with WARP.
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