Question

1. Suppose we have observed a consumer making the following choices:

Table 1: Observed Consumption Choices

p1 p2 y q1 q2  

1 1 6 4 2

2 1 8 3 2

1 1 7 3 4

Does this consumer satisfy the weak axiom of revealed preferences?

Answer 1

The WARP states that if a consumption bundle (x1,y1) is preferred over another consumption bundle (x2,y2) then there can be no price or income level where (x2,y2) is preferred over (x1,y1)

In the given case, WARP is not being violated and is thus satisfied because no one bundle is preferred over another at another set of prices.

That is, when (4,2) are chosen at prices (1,1) and (3,2) are chosen at prices (2,1) then (4,2) will never be chosen when prices are (2,1)

This means there is no indifference curve in the indifference map where both bundles are profit maximizing