Answer to Question #83861 in Microeconomics for Dan

Question

critically examine how revealed preference theory relates to consumer demand

Answer 1

Examining How Revealed Preference Theory Relates to Consumer Demand

The theory was put forward by Paul Samuelson, and it has gained various advantages over other approaches such as the Marshallian Cardinal Utility theory. As such, it is the first theory to apply the behavioristic method, which is essential in deriving demand theorem depending on observed behavior of consumers. Thus, the behavioristic method is a more scientific approach compared to the introspective approach. Therefore, there are multiple concepts noticeable from the theory. These are;

Ordinal Utility

Prof. Samuelson states that utilities are a comparable primary meaning they are not quantifiable. As such, the theory is based on the ordinal utility concept.

Preference Hypothesis

This means that when a consumer chooses a specific right combination, for instance, X, out of the numerous combinations, which are available to the consumer in a preferred price-income situation, then the consumer reveals her preference for the identified combination (Sethy, n.p). This will enable the consumer to reject the rest of the combination. As such, the ‘choice reveals preference’ means that ‘choice identifies the preference stated; preference hypothesis can obtain crucial information regarding a consumer’s preference depending on his behavior in the various price-income situations.

Work Cited

Sethy, Pradeep. “5 Concepts on Which the Revealed Preference Theory is Based.” Share Your Essays. https://www.shareyouressays.com/knowledge/5-concepts-on-which-the-revealed-preference-theory-is-based/95751 (Accessed 19 Dec 2018)