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 (p₁, p₂)= (16, 4). A)Desmond's consumption in Australia is directly revealed preferred to his consumption in Belgium. B)His consumption in Australia is indirectly revealed preferred to his consumption in Belgium. C)His consumption in Australia is indirectly but not directly revealed preferred to his consumption in Canada. D)We can't tell if he was better off in Belgium or in Australia. E)None of the above.

Question

Quizplus · Accepted Answer

Since Desmond's tastes do not change, we can compare his commodity bundle in Belgium to his commodity bundle in Canada through his consumption in Australia. His consumption in Australia indirectly reveals that he prefers (7, 8) to (9, 4) since he purchased (7, 8) in Australia when prices were (16, 4) and (9, 4) in Belgium when prices were (3, 3). We cannot directly compare his consumption in Australia to his consumption in Canada since we do not have a common set of prices to compare them to. Therefore, choice B is the best option.

Desmond Has Lived in Australia, Belgium, and Canada