Question

Suppose Jonathan’s preference over goods X and Y remains unchanged over two periods. In the first period the prices were given by P_x=20, P_y=10, and he chose bundle A=(4,2) ; in the second period the prices were given by P_x=10, P_y=20, and he chose the bundle B=(2,4). Then what does revealed preference analysis tell us?

Group of answer choices

Jonathan’s income changes in the second period

bundle B is not affordable in the first period

Jonathan cannot be maximizing utility

bundle A is not affordable in the second period

Answer 1

c)"Jonathan cannot be maximizing utility"- is the correct answer.

considering the preference of the two products remains same in the two periods the their marginal utility in the two periods remains same.

---let both the bundles be on an indifference curve U1.

1)Thier MRS will be delta(x)/Delta(y)

=(4-2)/(4-2), = 1

so the resulting MRS is 1.

2)Now considering the budget line from the prices of the two commodities given

A)The slope of Bugdet line for the first period is Px/Py=20/10.

hence, slope is 2.

B)The slope of Bugdet line for the second period is Px/Py=1/2.

3) To maximise utility MRS=slope of budget line.

As the slopes in both the periods is not equal to the MRS Jonathan cannot be maximizing his utility.