Question

Please discuss some pros and cons of the Utility theory compared to the Revealed preference theory.

Answer 1

The pros of the Utility theory compared to the Revealed Preference theory are as follows:

1) Considers the possibility of indifference in the behaviour of the consumer

2) Provides distinction between the income effect and the substitution effect of the price change

3) Deals with the individual demand curve

4) Takes into account only those customers whose market behaviour is governed strictly by the current market conditions

The cons of the Utility theory compared to the Revealed Preference theory are as follows:

Unlike the Utility theory,

1) Revealed Preference theory is more realistic

2) Revealed Preference theory is more scientific

3) Revealed Preference theory is more consistent

4) Revealed Preference theory is based on fewer assumptions