Question

Please explain/show work.

When prices are ($6, $3), Holly chooses the bundle (9, 18), and when prices are ($1, $2), she chooses the bundle (8, 14).

a. The bundle (9, 18) is revealed preferred to the bundle (8, 14) and she does not violate WARP.

b. She violates SARP but not WARP.

c. The bundle (8, 14) is revealed preferred to the bundle (9, 18) and she does not violate WARP.

d. She violates WARP.

e. None of the above.

Answer 1

The correct option is A) . The bundle (9, 18) is revealed preferred to the bundle (8, 14) and she does not violate WARP

Assumption of WARP says that when A is revealed preferred to B, then it must happen in every case. It cannot happen that B is revealed preferred to A when the budget changes.

Here in the given question, A is revealed preferred to B. When B is chosen A is not affordable. Hence WARP is getting satisfied. There is no voilation of WARP. Bundle A (9,18) is revealed preferred to bundle B(8,14).