Suppose whenever Larry goes out to dinner he always choose the second most expensive item on the menu. Provide an example where Larry’s choices will violate the Weak Axiom of Revealed Preference. Argue that Larry is not a rational economic agent.
Answer:
The weak axiom of revealed preferences states that, given the level of budget and the consumer preferences remain the same, there should be no situations in which Larry prefers any other item over the second most expensive item on the menu. If larry choses any other item we must assume that he has enough money left over to choose the second most expensive item as well.
For example:
Given budget: 10 dollars
Cost of most expensive item: 8 dollars
Cost of second most expensive item: 6 dollars
Therefore given the set budget and price, when both are affordable;
If Larry choses B over A it means that in no situation will he ever take A over B unless he has additional income to purchase B as well.
Therefore, given WARP, if Larry decided to start buying A instead of B, given the same level of income, price and preferences he will be violating the Weak Axiom of Revealed Preference.
Rational Economic Agent:
It can be concluded that if Larry ever choses A over B, he will not be a rational economic agent. Also the question states that each time he goes out he chooses the second most expensive options, in reality different places will have different food on their menu as the second most expensive item, this proves that Larry isn't acting based on preference, which means that he is not a rational economic agent.
Suppose whenever Larry goes out to dinner he always choose the second most expensive item on...
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