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 (p_1,p₂) = (16, 4).

Question

Quizplus · Accepted Answer

To determine whether Desmond's consumption in Australia is directly preferred, indirectly preferred, or not preferred at all to his consumption in Belgium, we need to compare the two commodity bundles. Looking at the numbers, we can see that Desmond consumed more of both goods in Belgium than in Australia, so it's not immediately obvious which he preferred more.

However, we can use the information about prices to determine whether he was able to afford more in Australia or Belgium. Since the prices of both goods were the same in Australia and Canada, we can compare the total spending on each good in each country. In Australia, Desmond spent 7*3 + 8*3 = $45 on his bundle, while in Belgium he spent 9*3 + 4*3 = $39. This means that he was able to afford more in Australia than in Belgium, and so his consumption in Australia is indirectly revealed preferred to his consumption in Belgium.

Desmond Has Lived in Australia, Belgium, and Canada