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Real Income Growth And Revealed Preference Inconsistency

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Author Info
David Jerison ()
Michael Jerison ()
Abstract

If a smooth demand function violates the strong axiom of revealed preference, the income and prices can follow a cycle and returm to their starting values even though real income is always rising. We show how real income growth along the “worst” revealed preference cycle depends on the range of price variation and on violations of the Slutsky conditions. We relate this result to proposed reforms of the consumer price index and use it to justify a new index of local demand inconsistency. We also use the Slutsky matrix to determine an upper bound on the number of observations required to detect revealed preference inconsistency.

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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we012902.

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Date of creation: May 2001
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Handle: RePEc:cte:werepe:we012902

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  1. Richter, Marcel K., 1979. "Duality and rationality," Journal of Economic Theory, Elsevier, vol. 20(2), pages 131-181, April. [Downloadable!] (restricted)
  2. Jerison, David & Jerison, Michael, 1992. "Approximately rational consumer demand and ville cycles," Journal of Economic Theory, Elsevier, vol. 56(1), pages 100-120, February. [Downloadable!] (restricted)
  3. Amartya Sen, 1997. "Maximization and the Act of Choice," Econometrica, Econometric Society, vol. 65(4), pages 745-780, July.
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  4. Mattei, Aurelio, 2000. "Full-scale real tests of consumer behavior using experimental data," Journal of Economic Behavior & Organization, Elsevier, vol. 43(4), pages 487-497, December. [Downloadable!] (restricted)
  5. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140. [Downloadable!] (restricted)
  6. Hurwicz, Leonid & Richter, Marcel K, 1979. "Ville Axioms and Consumer Theory," Econometrica, Econometric Society, vol. 47(3), pages 603-19, May. [Downloadable!] (restricted)
  7. Shafer, Wayne J., 1977. "Revealed preference cycles and the slutsky matrix," Journal of Economic Theory, Elsevier, vol. 16(2), pages 293-309, December. [Downloadable!] (restricted)
  8. M. Browning & P. A. Chiappori, 1998. "Efficient Intra-Household Allocations: A General Characterization and Empirical Tests," Econometrica, Econometric Society, vol. 66(6), pages 1241-1278, November.
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  9. Afriat, S N, 1973. "On a System of Inequalities in Demand Analysis: An Extension of the Classical Method," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 460-72, June. [Downloadable!] (restricted)
  10. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June. [Downloadable!] (restricted)
  11. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May. [Downloadable!] (restricted)
  12. Jerison, Michael, 1994. "Optimal Income Distribution Rules and Representative Consumers," Review of Economic Studies, Blackwell Publishing, vol. 61(4), pages 739-71, October. [Downloadable!] (restricted)
  13. Boskin, Michael J, et al, 1998. "Consumer Prices, the Consumer Price Index, and the Cost of Living," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 3-26, Winter. [Downloadable!] (restricted)
  14. Koo, Anthony Y C & Hasenkamp, Georg, 1972. "Structure of Revealed Preference: Some Preliminary Evidence," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 724-44, July-Aug.. [Downloadable!] (restricted)
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