IFS Working Papers (W12/03)

Revealed preference in a discrete consumption space

Date: 07 March 2012
Authors: Matthew Polisson and John Quah
ISSN: 1742-0415
DOI: 10.1920/wp.ifs.2012.1203

We show that an agent maximizing some utility function on a discrete (as opposed to continuous) consumption space will obey the generalized axiom of revealed preference (GARP) so long as the agent obeys cost efficiency. Cost efficiency will hold if there is some good, outside the set of goods being studied by the modeler, that can be consumed by the agent in continuous quantities. An application of Afriat's Theorem then guarantees that there is a strictly increasing utility function on the discrete consumption space that rationalizes price and demand observations in that space.