Revealed Preference Theory
Revealed Preference Theory Revealed preference theory was given by Paul A. Samuelson. According to him, utility analysis and indifference curve analysis are based on unrealistic assumptions as neither utility can be measured nor preferences of an individual can be obtained. The main merit of the revealed preference theory is that the 'law of demand' can be directly derived from the revealed preference axioms without using indifference curves and most of the restrictive assumptions. It only records the observed behavior of the consumer in the market. The consumer reveals his behavior by the bundle of goods, that he buys at different prices. Revealed preference theory is based on observable and testable hypotheses. Thus, there is a shift from the psychological to the behavioristic explanation of consumer behavior. According to this theory, the consumer is supposed to reveal the nature of his preferences. Assumptions: 1. Rationality- The consumer is rational in behavior w...