Managerial Economics

Chapter 7

Revealed Preference Theory

After studying this chapter, you should be able to understand:

• Revealed preference theory analyses the behaviour of the consumers from what Is revealed by them in the market.
• It Is a ‘behavIourist–ordlnallst’ approach.
• The budget set Includes all the combinations on and within the budget line from which a consumer can choose any combination of goods x and y.
• When a consumer chooses a combination in or on the budget set, he reveals his preference for that combination as compared with the other combinations.
• The cost difference variation in income is necessary to reduce the real income (equals the money income divided by the price of the good) of the consumer, which had gone up due to a decrease in the price ...