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Normality of demand in a two-goods setting

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  • Laurens Cherchye
  • Thomas Demuynck
  • Bram De Rock

Abstract

We study the testable implications of normal demand in a two-goods setting. For a finite dataset on prices and quantities, we present the revealed preference conditions for normality of one or both goods. Our characterization provides an intuitive extension of the well-known Weak Axiom of Revealed Preference, and is easy to use in practice. We illustrate the empirical relevance of our theoretical results through an application to the experimental dataset presented in Andreoni and Miller (2002).

Suggested Citation

  • Laurens Cherchye & Thomas Demuynck & Bram De Rock, 2016. "Normality of demand in a two-goods setting," Working Papers of Department of Economics, Leuven 549206, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    • Handle: RePEc:ete:ceswps:549206
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    References listed on IDEAS

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    1. Christopher P. Chambers & Federico Echenique & Eran Shmaya, 2011. "Testable Implications of Gross Substitutes in Demand for Two Goods," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 129-136, February.
    2. Cherchye, Laurens & Demuynck, Thomas & De Rock, Bram & Hjertstrand, Per, 2015. "Revealed preference tests for weak separability: An integer programming approach," Journal of Econometrics, Elsevier, vol. 186(1), pages 129-141.
    3. Alarie, Yves & Bronsard, Camille & Ouellette, Pierre, 1990. "Preferences and normal goods: A necessary and sufficient condition," Journal of Economic Theory, Elsevier, vol. 51(2), pages 423-430, August.
    4. Diewert, W. E. & Parkan, C., 1985. "Tests for the consistency of consumer data," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 127-147.
    5. Richard Blundell & Xiaohong Chen & Dennis Kristensen, 2007. "Semi-Nonparametric IV Estimation of Shape-Invariant Engel Curves," Econometrica, Econometric Society, vol. 75(6), pages 1613-1669, November.
    6. Fisher, Franklin M., 1990. "Normal goods and the expenditure function," Journal of Economic Theory, Elsevier, vol. 51(2), pages 431-433, August.
    7. Chambers, Christopher P. & Echenique, Federico & Shmaya, Eran, 2010. "On behavioral complementarity and its implications," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2332-2355, November.
    8. Hugh Rose, 1958. "Consistency of Preference: The Two-Commodity Case," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 25(2), pages 124-125.
    9. Andreu Mas-Colell, 1978. "On Revealed Preference Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(1), pages 121-131.
    10. James Andreoni & Charles Sprenger, 2012. "Estimating Time Preferences from Convex Budgets," American Economic Review, American Economic Association, vol. 102(7), pages 3333-3356, December.
    11. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-973, July.
    12. Bilancini, Ennio & Boncinelli, Leonardo, 2010. "Preferences and normal goods: An easy-to-check necessary and sufficient condition," Economics Letters, Elsevier, vol. 108(1), pages 13-15, July.
    13. Hal R. Varian, 1983. "Non-parametric Tests of Consumer Behaviour," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(1), pages 99-110.
    14. Leroux, Alain, 1987. "Preferences and normal goods: A sufficient condition," Journal of Economic Theory, Elsevier, vol. 43(1), pages 192-199, October.
    15. W. Erwin Diewert, 2012. "Afriat's Theorem and some Extensions to Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 122(560), pages 305-331, May.
    16. repec:ecj:econjl:v:122:y:2012:i::p:305-331 is not listed on IDEAS
    17. John Quah, 2012. "A revealed preference test for weakly separable preferences," Economics Series Working Papers 601, University of Oxford, Department of Economics.
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    Cited by:

    1. Laurens Cherchye & Thomas Demuynck & Bram De Rock & Khushboo Surana, 2020. "Revealed Preference Analysis with Normal Goods: Application to Cost-of-Living Indices," American Economic Journal: Microeconomics, American Economic Association, vol. 12(3), pages 165-188, August.
    2. Cosaert, Sam & Lefebvre, Mathieu & Martin, Ludivine, 2022. "Are preferences for work reference dependent or time nonseparable? New experimental evidence," European Economic Review, Elsevier, vol. 148(C).
    3. Federico Echenique, 2020. "New Developments in Revealed Preference Theory: Decisions Under Risk, Uncertainty, and Intertemporal Choice," Annual Review of Economics, Annual Reviews, vol. 12(1), pages 299-316, August.
    4. Pierpaolo Angelini, 2023. "Probability Spaces Identifying Ordinal and Cardinal Utilities in Problems of an Economic Nature: New Issues and Perspectives," Mathematics, MDPI, vol. 11(20), pages 1-22, October.
    5. Fabrizio Maturo & Pierpaolo Angelini, 2023. "Aggregate Bound Choices about Random and Nonrandom Goods Studied via a Nonlinear Analysis," Mathematics, MDPI, vol. 11(11), pages 1-30, May.

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    More about this item

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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