Question

Please show work.

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.

Answer 1

There are three bundles of goods, x and y in each of the three cities which are bought by Carlos denoted as

and the two price sets of goods x and y denoted as

Now, one needs to find the costs of each of the bundles at the given two price sets to determine revealed preferences of the consumer.

At

Cost for bundle A is :

Cost for bundle B is :

Cost for bundle C is :

At this price set, least cost is for bundle C but we know that bundle A was chosen so A is directly revealed preferred to C and B is not a feasible bundle at this price.

Similarly, At

Cost for bundle A is :

Cost for bundle B is :

Cost for bundle C is :

At this price set comparing the costs one can say that bundle B and bundle C should be indifferent but it is given that C is directly revealed preferred to B and bundle A is not feasible in this case.

From the above two preferrences using weak axiom of revealed preferrence, one can say that A is preferred to C, C is preferred to B hence, A is indirectly revealed preferred to C.

option B is the answer