Revealed Preference in a Discrete Consumption Space
We show that an agent maximizing some utility function on a discrete (as opposed to continuous) consumption space will obey the generalized axiom of revealed preference (GARP) so long as the agent obeys cost efficiency. Cost efficiency will hold if there is some good, outside the set of goods being studied by the modeler, that can be consumed by the agent in continuous quantities. An application of Afriat's Theorem then guarantees that there is a strictly increasing utility function on the discrete consumption space that rationalizes price and demand observations in that space.
|Date of creation:||Jan 2012|
|Date of revision:||Feb 2012|
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- Donald J. Brown & Caterina Calsamiglia, 2005.
"The Nonparametric Approach to Applied Welfare Analysis,"
Cowles Foundation Discussion Papers
1507, Cowles Foundation for Research in Economics, Yale University.
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CESifo Working Paper Series
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- W. E. Diewert, 1973. "Afriat and Revealed Preference Theory," Review of Economic Studies, Oxford University Press, vol. 40(3), pages 419-425.
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