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Revealed preference theory for finite choice sets

  • Sam COSAERT
  • Thomas DEMUYNCK

The theory of revealed preferences offers an elegant way to test the neoclassical model of utility maximization subject to a linear budget constraint. In many settings, however, the set of available consumption bundles does not take the form of a linear budget set. In this paper, we adjust the theory of revealed preferences to handle situations where the set of feasible bundles is finite. Such situations occur frequently in many real life and experimental settings. We derive the revealed preference conditions for consistency with utility maximization in this finite choice-set setting. Interestingly, we find that it is necessary to make a distinction between the cases where the underlying utility function is weakly monotone, strongly monotone and/or concave. Next, we provide conditions on the structure of the finite choice sets for which the usual revealed preference condition (i.e. GARP) is still valid. We illustrate the relevance of our results by means of an application based on two experimental data sets that contain choice behavior from children.

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Paper provided by KU Leuven, Faculty of Economics and Business, Department of Economics in its series Working Papers Department of Economics with number ces13.08.

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Date of creation: Apr 2013
Handle: RePEc:ete:ceswps:ces13.08
Contact details of provider: Web page: http://feb.kuleuven.be/Economics/

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