Question

X1=(5,4,3) X2=(7,5,3) X{3}=(10,1,1) The prices levels for different period is as follows: P 1=(2,2,1) P 2=(2,1,1.5) P 3=(1,2,2) The choice set is such that under the price level P1 optimal choice in X1, under price level P2 the optimal choice is X ​

, and under the price level P3 is choice level X3. Does it fulfill WARP? Does is fulfill SARP? What are the implications of violating SARP?

Answer 1

The choice set does not fulfill WARP but fulfills SARP. Violating SARP implies inconsistent preferences and can affect the consumer's decision-making.

Step-by-step explanation:

WARP (Weak Axiom of Revealed Preference) states that if a particular bundle (X1) is chosen when the price level is P1, and a different bundle (X2) is chosen when the price level is P2, then X1 cannot be weakly preferred to X2 at both price levels. In this case, X1 is weakly preferred to X2 at P1, but it is not weakly preferred to X2 at P2. Therefore, the choice set does not fulfill WARP.

SARP (Strong Axiom of Revealed Preference) states that if a particular bundle (X1) is chosen when the price level is P1, and a different bundle (X2) is chosen when the price level is P2, then X1 cannot be weakly preferred to X2 at any price level. In this case, X1 is weakly preferred to X2 at both P1 and P2. Therefore, the choice set fulfills SARP.

Violating SARP implies that the consumer's preferences are inconsistent. It suggests that the consumer is not making rational choices based on their preferences and the available options. This can have implications for the consumer's overall well-being and satisfaction, as they may not be maximizing their utility or making optimal decisions.