0
$\begingroup$

I'm studying Varian's Intermediate Microeconomics, in which the principle of revealed principle is stated as follows (for now we're assuming strictly convex indifference curves):

Let $(x_1, x_2)$ be the chosen bundle when prices are $(p_1, p_2)$, and let $(y_1, y_2)$ be some other bundle such that $p_1x_1+p_2x_2 \geq p_1y_1+p_2y_2$. Then if the consumer is choosing the most preferred bundle she can afford, we must have $(x_1,x_2) \succ (y_1,y_2)$.

It's further stated that "if the consumer chooses the best bundles she can afford, then the revealed preference implies preference". I can't get an intuitive grasp on this. Even if a bundle $X$ is chosen to $Y$ $(Y \neq X)$, and even if $X$ isn't the best affordable bundle, shouldn't that at least imply that $X \succ Y$? Because if not, then there must be some example where $Y \succeq X$ and still the consumer chose $X$.

Is there some counterexample in which revealed preference of $X$ does not imply preference, provided that the chosen bundle $X$ isn't the best affordable one?

$\endgroup$
1
$\begingroup$

The text basically explains that consumer is assumed to be rational. This means the consumer can identify the best bundle and picks that as her choice.

If the consumer was unable to identify the bundle that is best for her or was simply choosing randomly rather than based on her preference then her choice would not reveal anything about her preferences.

$\endgroup$
  • $\begingroup$ That makes sense, but I was confused because earlier in the "Revealed Preferences" section, the author says, "Suppose that we are willing to postulate that this consumer is an optimizing consumer...". So then if the consumer is perfectly rational, is it safe to assume that revealed preference of $X$ to $Y$ will always imply preference of $X$ to $Y$? $\endgroup$ – u23 Mar 25 '17 at 12:49
  • $\begingroup$ @ShirishKulhari Yes, in this full information context that is true. $\endgroup$ – Giskard Mar 25 '17 at 13:15

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.