CHAPTER 7: Revealed Preference
TRUE/FALSE
1. The strong axiom of revealed preference requires that if a consumer chooses x when he can afford y
and chooses y when he can afford z, then he will not choose z when he can afford x.
2. Rudolf Rational obeys the weak axiom of revealed preferences. His preferences don’t change over
time. One year he could afford bundle x but bought bundle y. If another year he buys bundle x, then he
can’t afford bundle y.
3. If a consumer maximizes a utility function subject to a budget constraint and has strictly convex
preferences, then his behavior will necessarily satisfy the weak axiom of revealed preference and the
strong axiom of revealed preference.
4. The Laspeyres index of prices in period 2 relative to period 1 tells us the ratio of the cost of buying the
period 1 bundle at period 2 prices to the cost of buying the period 1 bundle at period 1 prices.
5. The Laspeyres price index differs from the Paasche price index because the Laspeyres index holds
prices constant and varies quantities while the Paasche price index holds quantities constant and varies
prices.
6. Patience was maximizing her utility subject to her budget constraint. Prices changed and Patience was
less well off than before. Therefore, at the old prices her new bundle must cost less than her old
bundle.
7. It follows from the weak axiom of revealed preference that if a consumer chooses x when he could
afford y and chooses y when he could afford x, then his income must have changed between the two
observations.
8. The strong axiom of revealed preference says that if a consumer bought x when he could have afforded
y and bought y when he could have afforded z, then he will buy x whenever he can afford z.
9. An increase in the price of an inferior good makes the people who consume that good better off.
10. Prudence was maximizing her utility subject to her budget constraint. Then prices changed. After the
change, she is better off. Therefore the new bundle costs more at the old prices than the old bundle did.
11. The Laspeyres price index differs from the Paasche price index because the Paasche index holds prices
constant and varies quantities, while the Laspeyres index holds quantities constant and varies prices.
12. It is possible for a consumer to satisfy the weak axiom of revealed preference but violate the strong
axiom of revealed preference.
13. For a consumer who has an allowance to spend and no endowment of goods, a decrease in the price of
an inferior good consumed makes him better off.
14. There are two goods, bananas and potatoes. The price of bananas increases and the price of potatoes
decreases. If after the price change a consumer (whose preferences satisfy WARP) can still exactly
afford her old consumption bundle, then she will consume at least as many potatoes as before, even if
potatoes are a Giffen good.
MULTIPLE CHOICE
1. Let A stand for the bundle (7, 9), B stand for the bundle (10, 5), and C stand for the bundle (6, 6).
When prices are (2, 4), Betty chooses C. When prices are (12, 3) she chooses A.
a.
A is directly revealed preferred to B.
b.
A is indirectly revealed preferred to B.
c.
C is directly revealed preferred to A.
d.
B is directly revealed preferred to A.
e.
None of the above.
2. Remember that the Laspeyres price index uses the old quantities for the weights. In 1991, good x cost
$5 and good y cost $1. The current price of good x is $7 and the current price of good y is $6. In 1991
the consumption bundle was (x, y) = (2, 4). The current consumption bundle is (x, y) = (5, 3).
The Laspeyres index of current prices relative to 1991 prices is closest to which of the following
numbers?
a.
3.79
b.
2.71
c.
0.26
d.
1.89
e.
1.26
3. Remember that the Laspeyres price index uses the old quantities for the weights. In 1991, good x cost
$2 and good y cost $1. The current price of good x is $6 and the current price of good y is $2. In 1971
the consumption bundle was (x, y) = (3, 6). The current consumption bundle is (x, y) = (6, 4). The
Laspeyres index of current prices relative to 1991 prices is closest to which of the following numbers?
a.
2.50
b.
3.67
c.
2.75
d.
0.27
e.
1.27
4. Twenty years ago, Dmitri consumed bread which cost him 10 kopeks a loaf and potatoes which cost
him 20 kopeks a sack. With his income of 330 kopeks, he bought 9 loaves of bread and 12 sacks of
potatoes. Today he has an income of 452 kopeks. Bread now costs him 22 kopeks a loaf and potatoes
cost him 17 kopeks a sack. Assuming his preferences haven’t changed (and the sizes of loaves and
sacks haven’t changed), when was he better off?
a.
He was better off 20 years ago.
b.
He is better off today.
c.
He was equally well off in the two periods.
d.
From the information given here, we are unable to tell.
e.
None of the above.
5. Twenty years ago, Dmitri consumed bread which cost him 10 kopeks a loaf and potatoes which cost
him 18 kopeks a sack. With his income of 230 kopeks, he bought 5 loaves of bread and 10 sacks of
potatoes. Today he has an income of 400 kopeks. Bread now costs him 20 kopeks a loaf and potatoes
cost him 25 kopeks a sack. Assuming his preferences haven’t changed (and the sizes of loaves and
sacks haven’t changed), when was he better off?
a.
He was equally well off in the two periods.
b.
He is better off today.
c.
He was better off 20 years ago.
d.
From the information given here, we are unable to tell.
e.
None of the above.
6. At prices ($4, $12), Harry chooses the bundle (9, 4). At the prices ($8, $4), Harry chooses the bundle
(2, 9). Is this behavior consistent with the weak axiom of revealed preference?
a.
Yes.
b.
No.
c.
It depends on his income.
d.
We would have to observe a third choice to be able to say.
e.
None of the above.
7. When prices are ($6, $3), Holly chooses the bundle (9, 18), and when prices are ($1, $2), she chooses
the bundle (8, 14).
a.
The bundle (9, 18) is revealed preferred to the bundle (8, 14) and she does not violate
WARP.
b.
She violates SARP but not WARP.
c.
The bundle (8, 14) is revealed preferred to the bundle (9, 18) and she does not violate
WARP.
d.
She violates WARP.
e.
None of the above.
8. When prices are ($4, $2), Tomoko chooses the bundle (9, 18), and when prices are ($1, $2), she
chooses the bundle (8, 14).
a.
The bundle (8, 14) is revealed preferred to the bundle (9, 18) and she does not violate
WARP.
b.
She violates SARP but not WARP.
c.
The bundle (9, 18) is revealed preferred to the bundle (8, 14) and she does not violate
WARP.
d.
She violates WARP.
e.
None of the above.
9. Maria consumes strawberries which cost her 10 pesos a box and bananas which cost her 9 pesos a
bunch. With her income of 192 pesos she buys 12 boxes of strawberries and 8 bananas. Daphne, with
an income of 170 shillings, consumes strawberries at a cost of 6 shillings each and bananas at a cost of
12 shillings each. Assuming their preferences are identical,
a.
Maria would prefer Daphne’s consumption bundle to her own.
b.
Daphne would prefer Maria’s consumption bundle to her own.
c.
they would both be indifferent between their own bundles and the other’s.
d.
each prefers her own bundle to the other’s.
e.
we can’t make any of the above statements without more information.
10. In 1991, good x cost $5 and good y cost $1. They now cost $9 and $5 respectively. In 1991 the
consumption bundle of x and y was 4 x’s and 5 y’s. It is now 9 x’s and 7 y’s. Calculate the Laspeyres
index of current prices relative to 1991 prices rounded to one decimal place. (Remember the Laspeyres
index uses the old quantities for weights.)
a.
0.5
b.
2.4
c.
2.5
d.
2.2
e.
None of the above.
11. Carlos has at one time or another lived in Argentina, Bolivia, and Colombia. He buys only two goods,
x and y. In Argentina the prices were ($9, $3) and he consumed the bundle (6, 7). In Bolivia he
consumed (9, 2). In Colombia he consumed the bundle (6, 5) at the prices ($3, $3).
a.
The Argentine bundle is directly revealed preferred to the Bolivian bundle.
b.
The Argentine bundle is indirectly revealed preferred to the Bolivian bundle.
c.
The Colombian bundle is directly revealed preferred to the Argentine bundle.
d.
The Bolivian bundle is indirectly revealed preferred to the Argentine bundle.
e.
None of the above.
12. Prudence is careful to plan ahead. She is going to Paris next year to study. To protect herself from
exchange rate fluctuations, she bought a futures contract for the number of francs she plans to spend
next year, given current prices. When she arrives in Paris, she can cash in her contract for this many
francs no matter what the exchange rate is. If the value of the franc relative to the dollar should happen
to fall before she gets to Paris, she
a.
will be at least as well off and probably better off than if the exchange rate hadn’t
changed.
b.
will be worse off than if the exchange rate hadn’t changed.
c.
will be exactly as well off as if the exchange rate hadn’t changed.
d.
might be better off or she might be worse off, depending on whether she plans to spend
more or less than she does at home.
13. Jose consumes rare books which cost him 8 pesos each and pieces of antique furniture which cost him
10 pesos each. He spends his entire income to buy 9 rare books and 11 pieces of antique furniture.
Nigel has the same preferences as Jose, but faces different prices and has a different income. Nigel has
an income of 162 pounds. He buys rare books at a cost of 4 pounds each and pieces of antique
furniture at a cost of 11 pounds each.
a.
Nigel would prefer Jose’s bundle to his own.
b.
Jose would prefer Nigel’s bundle to his own.
c.
Neither would prefer the other’s bundle to his own.
d.
Each prefers the other’s bundle to his own.
e.
We can’t tell whether either would prefer the other’s bundle without knowing what
quantities Nigel consumes.
14. Twenty years ago, Amanda consumed cans of motor oil which cost her 6 pesos each and gallons of
gasoline which cost her 14 pesos each. With her income of 112 pesos, she bought 7 cans of motor oil
and 5 gallons of gasoline. Today she has an income of 230 pesos. Cans of motor oil now cost 10 pesos
each and gallons of gasoline now cost 32 pesos each. Assuming her preferences haven’t changed, she
a.
is definitely better off than she was 20 years ago.
b.
was definitely better off 20 years ago than she is now.
c.
is just as well off as she was 20 years ago.
d.
may be either better or worse off now than 20 years ago. There is not enough information
to determine which is the case.
e.
is behaving irrationally.
15. When prices are ($2, $4), Ms. Consumer chooses the bundle (7, 9), and when prices are ($15, $3), she
chooses the bundle (10, 3). Is her behavior consistent with the weak axiom of revealed preference?
a.
Yes.
b.
No.
c.
We would have to observe a third choice to be able to say.
d.
We can’t tell because we are not told her income in the two cases.
e.
None of the above.
16. Stan Ford currently spends $100 a week on entertainment. A rich uncle offers him a choice between a
$50 a week allowance and the opportunity to buy all of his entertainment at half price. Stan has no
kinks in his difference curves. Stan would
a.
prefer the $50 allowance.
b.
prefer the half-price subsidy.
c.
be indifferent between the allowance and the subsidy.
d.
prefer the subsidy if entertainment is a normal good and be indifferent otherwise.
e.
prefer the allowance if entertainment is an inferior good and prefer the subsidy otherwise.
17. When prices are ($2, $10), Emil chooses the bundle (1, 6), and when prices are ($12, $4), he chooses
the bundle (7, 2).
a.
Emil violates WARP.
b.
Emil has kinked indifference curves.
c.
The bundle (1, 6) is revealed preferred to (7, 2), but (7, 2) is not revealed preferred to
(1, 6).
d.
The bundle (7, 2) is revealed preferred to (1, 6), but (1, 6) is not revealed preferred to
(7, 2).
e.
None of the above.
18. Desmond has lived in Australia, Belgium, and Canada. His tastes never changed but his income and
prices did. In Australia his commodity bundle was (x1, x2) = (7, 8), in Belgium it was (9, 4), and in
Canada it was (7, 5). Prices in Canada were (p1, p2) = (3, 3), and prices in Australia were (p1, p2) = (3,
3), and prices in Australia were (p1, p2) = (16, 4).
a.
Desmond’s consumption in Australia is directly revealed preferred to his consumption in
Belgium.
b.
His consumption in Australia is indirectly revealed preferred to his consumption in
Belgium.
c.
His consumption in Australia is indirectly but not directly revealed preferred to his
consumption in Canada.
d.
We can’t tell if he was better off in Belgium or in Australia.
e.
None of the above.
19. If all prices increase by 20%,
a.
the Paasche price index increases by more than 20% and the Laspeyres price index
increases by less than 20%.
b.
the Laspeyres price index increases by more than 20% and the Paasche price index
increases by less than 20%.
c.
both the Paasche price index and the Laspeyres price index increase by more than 20%.
d.
both the Paasche price index and the Laspeyres price index increase by exactly 20%.
e.
both the Paasche price index and the Laspeyres price index increase by less than 20%.
20. A student spends all of her income on pizza and books. When pizzas cost $3 each and books cost $10
each, she consumed 30 pizzas and 3 books per month. The price of pizzas fell to $2.90 each while the
price of books rose to $11 each. The price change
a.
made her worse off.
b.
left her exactly as well off as before.
c.
left her at least as well off as before and possibly helped her.
d.
might have helped her, might have harmed her. We can’t tell which unless we observe
what she consumed after the price change.
e.
had the same effect as a $3 increase in her income.
21. A consumer’s behavior was observed in three situations with different prices and incomes. In situation
1, she chose a bundle that cost $1,600. In situation 2, she chose a bundle that cost $2,500. In situation
3, she chose a bundle that cost $3,100. The bundle purchased in situation 2 would cost $1,200 at
situation 1 prices. The bundle purchased in situation 3 cost $2,000 at situation 2 prices. This
consumer’s behavior is known to satisfy the strong axiom of revealed preference. Therefore, the
bundle purchased in situation
a.
1 must cost less than $3,100 at situation 3 prices.
b.
3 must cost at least $3,100 at situation 1 prices.
c.
1 can not cost less than $3,100 at situation 3 prices.
d.
2 must cost at least $3,100 at situation 1 prices.
e.
None of the above.
22. Recall that the Laspeyres price index (P.I.) uses the old bundle as weights and the Paasche price index
uses the new bundle as weights. If the prices of all goods double and your income triples,
a.
your income increase has exceeded the increase in the Laspeyres P.I. but may not have
exceeded the increase in the Paasche P.I.
b.
your income increase has exceeded the increase in the Laspeyres P.I. and has also
exceeded the increase in the Paasche P.I.
c.
your income increase has exceeded the increase in the Paasche P.I. but may not have
exceeded the increase in the Laspeyres P.I.
d.
you would need to know the old and new consumption bundles to compare your income
change with the change in price indexes.
e.
None of the above.
23. If the government gave you a subsidy of $100 per month that you had to spend on housing and if you
could spend the remainder of your income in any way you wished, the effect of the subsidy would
differ from the effect of a $100 per month unrestricted increase in your income only if
a.
housing were an inferior good for you.
b.
housing were a normal good for you.
c.
you would spend less than $100 per month on housing when you received the unrestricted
$100 monthly increase in your income.
d.
you would spend more than $100 per month on housing when you received the
unrestricted $100 monthly increase in your income.
e.
your preferences were homothetic.
24. When the prices were ($5, $1), Vanessa chose the bundle (x, y) = (6, 3). Now at the new prices, (px,
py), she chooses the bundle (x, y) = (5, 7). For Vanessa’s behavior to be consistent with the weak
axiom of revealed preference, it must be that
a.
4py px.
b.
px 4py.
c.
5py px.
d.
py = 5px.
e.
None of the above.
25. When the prices were ($4, $1), Maria chose the bundle (x, y) = (8, 6). Now at the new prices, (px, py),
she chooses the bundle (x, y) = (7, 9). For Maria’s behavior to be consistent with the weak axiom of
revealed preference, it must be that
a.
py = 4px.
b.
4py px.
c.
3py px.
d.
px 3py.
e.
None of the above.
26. At prices (p1, p2) = ($4, $1), George buys the bundle (x1, x2) = (10, 20). At prices (p‘1, p‘2) = ($1, $4),
he buys the bundle (x‘1, x‘2) = (4, 14). At prices (p”1, p”2), he buys the bundle (x”1, x”2) = (20, 10). If his
preferences satisfy the strong axiom of revealed preferences, then it must be that
a.
10p”1 10p”2.
b.
10p”1 8p”2.
c.
8p1 8p2.
d.
p”1 = p”2.
e.
None of the above.
27. At prices (p1, p2) = ($4, $2), Ivan buys the bundle (x1, x2) = (8, 20). At prices (p‘1, p‘2) = ($2, $4), he
buys the bundle (x‘1, x‘2) = (10, 13). At prices (p”1, p”2), he buys the bundle (x”1, x”2) = (14, 11). If his
preferences satisfy the strong axiom of revealed preferences, then it must be that
a.
8p1 2p2.
b.
6p”1 9p”2.
c.
6p”1 8p”2.
d.
p”1 = p”2.
e.
None of the above.
28. Tonal is a traveling substitute orchestra conductor. Each year, he starts in Ann Arbor, moves to
Brownsville, then to Carson City, and so on until he reaches Zilvania, Ohio, after which he returns to
Ann Arbor. He gets a salary according to the following simple rule. In Brownsville he is paid what his
Ann Arbor consumption bundle would cost in Brownsville. In Carson City he is paid what his
Brownsville bundle would cost in Carson City, and so on. After 26 two-week stints, he returns to Ann
Arbor, where he is paid the cost in Ann Arbor of his Zilvania bundle. At each stop, he spends his entire
salary on apples (A) and paperback books (B), so as to maximize the utility U = AB. Over the course of
the year, his utility will
a.
be constant at every stop.
b.
increase at every stop where relative prices are different from the previous stop.
c.
decrease at every stop where relative prices are different from the previous stop.
d.
increase or decrease depending on whether the Paasche price index goes down or up
between stops.
e.
increase or decrease depending on whether the Laspeyres price index goes down or up
between stops.
29. If Goldie chooses the bundle (6, 6) when prices are ($6, $2) and the bundle (10, 0) when prices are ($2,
$5),
a.
the bundle (6, 6) is revealed preferred to (10, 0) but there is no evidence that she violates
WARP.
b.
neither bundle is revealed preferred to the other.
c.
Goldie violates WARP.
d.
the bundle (10, 0) is revealed preferred to (6, 6) and she violates WARP.
e.
the bundle (10, 0) is revealed preferred to (6, 6) and there is no evidence that she violates
WARP.
30. If Goldie chooses the bundle (6, 6) when prices are ($6, $2) and the bundle (10, 0) when prices are ($5,
$5), Aif (P2 4)]
a.
the bundle (6, 6) is revealed preferred to (10, 0) but there is no evidence that she violates
WARP.
b.
neither bundle is revealed preferred to the other.
c.
the bundle (10, 0) is revealed preferred to (6, 6) and she violates WARP.
d.
Goldie violates WARP.
e.
the bundle (10, 0) is revealed preferred to (6, 6) and there is no evidence that she violates
WARP.
31. Pierre’s friend Henri lives in a town where he has to pay 3 francs per glass of wine and 5 francs per
loaf of bread. Henri consumes 5 glasses of wine and 4 loaves of bread per day. Bob has an income of
$15 per day and pays $.50 per loaf of bread and $2 per glass of wine. If Bob has the same tastes as
Henri and if the only thing that either of them cares about is consumption of bread and wine,
a.
Bob and Henri are equally well off.
b.
Henri is better off than Bob.
c.
Bob is better off than Henri.
d.
both of them violate the weak axiom of revealed preferences.
e.
we do not have enough information to be able to determine whether one is better off than
the other.
32. Pierre’s friend Henri lives in a town where he has to pay 3 francs per glass of wine and 6 francs per
loaf of bread. Henri consumes 9 glasses of wine and 4 loaves of bread per day. Bob has an income of
$15 per day and pays $.50 per loaf of bread and $2 per glass of wine. If Bob has the same tastes as
Henri and if the only thing that either of them cares about is consumption of bread and wine,
a.
Henri is better off than Bob.
b.
Bob and Henri are equally well off.
c.
both of them violate the weak axiom of revealed preferences.
d.
Bob is better off than Henri.
e.
we do not have enough information to be able to determine whether one is better off than
the other.
33. Consider the case of Ronald. Let the prices and consumptions in the base year be as in situation D,
where p1 = 3, p2 = 1, x1 = 5, and x2 = 15. If in the current year, the price of good 1 is $1 and the price of
good 2 is $2, and Ronald’s current consumptions of good 1 and good 2 are 25 and 25 respectively,
what is the Laspeyres price index of current prices relative to base year prices? (Pick the most nearly
correct answer.)
a.
1.17
b.
2.50
c.
0.75
d.
0.50
e.
1.75
34. Consider the case of Ronald. Let the prices and consumptions in the base year be as in situation D,
where p1 = 3, p2 = 1, x1 = 5, and x2 = 15. If in the current year, the price of good 1 is $1 and the price of
good 2 is $4, and Ronald’s current consumptions of good 1 and good 2 are 25 and 5 respectively, what
is the Laspeyres price index of current prices relative to base year prices? (Pick the most nearly correct
answer.)
a.
1.50
b.
2.17
c.
1.25
d.
1
e.
3.25
35. On the planet Homogenia, every consumer who has ever lived consumes only two goods, x and y, and
has the utility function U (x, y) = xy. The currency in Homogenia is the fragel. In this country in 1900,
the price of good 1 was 1 fragel and the price of good 2 was 2 fragels. Per capita income was 96
fragels. In 2000, the price of good 1 was 4 fragels and the price of good 2 was 5 fragels. The Laspeyres
price index for the price level in 2000 relative to the price level in 1900 is
a.
3.25.
b.
4.50.
c.
3.
d.
5.25.
e.
It is not possible to determine the Laspeyres price index from this information.
36. On the planet Homogenia, every consumer who has ever lived consumes only two goods, x and y, and
has the utility function U(x, y) = xy. The currency in Homogenia is the fragel. In this country in 1900,
the price of good 1 was 1 fragel and the price of good 2 was 2 fragels. Per capita income was 72
fragels. In 2000, the price of good 1 was 5 fragels and the price of good 2 was 2 fragels. The Laspeyres
price index for the price level in 2000 relative to the price level in 1900 is
a.
3.50.
b.
2.33.
c.
3.
d.
5.50.
e.
It is not possible to determine the Laspeyres price index from this information.
37. On the planet Hyperion, every consumer who has ever lived has a utility function U(x, y) = minx, 2y.
The currency of Hyperion is the doggerel. In 1850 the price of x was 1 doggerel per unit and the price
of y was 2 doggerels per unit. In 2000 the price of x was 11 doggerels per unit and the price of y was 4
doggerels per unit. The Paasche price index of prices in 2000 relative to prices in 1850 is
a.
6.50.
b.
5.
c.
2.75.
d.
3.75.
e.
It is not possible to determine the Paasche price index without further information.
38. On the planet Hyperion, every consumer who has ever lived has a utility function U(x, y) = minx, 2y.
The currency of Hyperion is the doggerel. In 1850 the price of x was 1 doggerel per unit and the price
of y was 2 doggerels per unit. In 2000 the price of x was 8 doggerels per unit and the price of y was 4
doggerels per unit. The Paasche price index of prices in 2000 relative to prices in 1850 is
a.
4.
b.
3.
c.
2.
d.
5.
e.
It is not possible to determine the Paasche price index without further information.
39. Howard Send is deciding whether to keep his car when he moves to New York City. To operate his car
for a year, he would have to pay a flat fee of $6,000 for auto insurance and parking, plus $.20 for every
mile that he drives for gasoline and repairs. Alternatively, he could give his car to his brother-in-law in
Buffalo (the market value of the car is negligible) and take taxicabs in New York, which cost $1 a
mile. Howard knows that if he took the car to New York he would drive 6,500 miles per year. If he
places no value, positive or negative, on his brother-in–law’s getting the car and if he is indifferent
between riding a cab and driving, he should
a.
keep his car if he wouldn’t want to travel as much as 6,500 miles by cab.
b.
give his car away if he wouldn’t travel more than 6,000 miles by cab but keep it if he
would travel more than 6,000 miles by cab.
c.
keep his car if he would travel more than 6,000 but less than 6,500 miles by cab.
d.
give his car away.
e.
There is not enough information given here to allow one to give him reasonable advice
about what to do.
40. Franco and Gianni have the same tastes and consume only two goods, wine and pizza. Franco lives in
Milano and spends 100,000 lire per week. It costs him 5,000 lire for a bottle of wine and 5,000 lire for
a pizza. Gianni lives in Napoli. It costs him 4,000 lire for a bottle of wine and 6,000 lire for a pizza. At
those prices, he chooses to buy 10 bottles of wine and 6 pizzas per week.
a.
Franco is better off with his own budget than he would be with Gianni’s.
b.
Gianni is better off with his own budget than he would be with Franco’s.
c.
Franco and Gianni violate WARP.
d.
Franco and Gianni are equally well off.
e.
There is not enough information to determine whether either would prefer the other’s
bundle.
41. Hillary has an initial endowment of $500 and is interested in two things: how many visits she can
make to the doctor and how much money will be left over to spend on other things. When a trip to the
doctor costs $50, Hillary sees the doctor 7 times. After health care reform, a visit to the doctor will
cost $10 but her taxes will rise by $360.
a.
Hillary will be made better off by health care reform.
b.
Hillary will be made worse off by health care reform.
c.
We cannot tell how health care reform will affect Hillary.
d.
Hillary violates the Weak Axiom of Revealed Preference.
e.
Hillary violates the Strong Axiom of Revealed Preference.
42. Hillary has an initial endowment of $500 and is interested in two things: how many visits she can
make to the doctor and how much money will be left over to spend on other things. When a trip to the
doctor costs $60, Hillary sees the doctor 3 times. After health care reform, a visit to the doctor will
cost $10 but her taxes will rise by $170.
a.
Hillary will be made better off by health care reform.
b.
Hillary violates the Weak Axiom of Revealed Preference.
c.
We cannot tell how health care reform will affect Hillary.
d.
Hillary will be made worse off by health care reform.
e.
Hillary violates the Strong Axiom of Revealed Preference.
PROBLEM
1. Hillary has an initial endowment of $500 and is interested in two things: how many visits she can
make to the doctor and how much money will be left over to spend on other things. When a trip to the
doctor costs $40, Hillary sees the doctor 4 times. After health care reform, a visit to the doctor will
cost $10 but her taxes will rise by $160.
a. Explain what conditions are necessary for Hillary to be made better off by health care reform.
b. Is it possible to tell whether Hillary has been made better off with the given information?
c. Explain what conditions are necessary for Hillary to be made worse off by health care reform.
d. Is it possible to tell whether Hillary has been made worse off with the given information?
2. Hillary has an initial endowment of $500 and is interested in two things: how many visits she can
make to the doctor and how much money will be left over to spend on other things. When a trip to the
doctor costs $60, Hillary sees the doctor 2 times. After health care reform, a visit to the doctor will
cost $10 but her taxes will rise by $100.
a. Explain what conditions are necessary for Hillary to be made better off by health care reform.
b. Is it possible to tell whether Hillary has been made better off with the given information?
c. Explain what conditions are necessary for Hillary to be made worse off by health care reform.
d. Is it possible to tell whether Hillary has been made worse off with the given information?