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Measuring Consumer Inconsistency: Real Income, Revealed Preference and the Slutsky Matrix

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  • Michael Jerison
  • David Jerison

Abstract

If a smooth consumer demand function violates the strong axiom of revealed preference, then income and prices can follow a cycle and return to their starting values even though real income has always risen. 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 use this result to justify a new index of local demand inconsistency. We also relate the result to proposed reforms of the consumer price index, and we provide a bound on the number of observations required to form a revealed preference cycle.

Suggested Citation

  • Michael Jerison & David Jerison, 1999. "Measuring Consumer Inconsistency: Real Income, Revealed Preference and the Slutsky Matrix," Discussion Papers 99-01, University at Albany, SUNY, Department of Economics.
  • Handle: RePEc:nya:albaec:99-01
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    Cited by:

    1. Ralph Bradley, 2003. "Price Index Estimation Using Price Imputation for Unsold Items," NBER Chapters,in: Scanner Data and Price Indexes, pages 349-382 National Bureau of Economic Research, Inc.

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