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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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