Working Paper No. 972

What Do Revealed Preference Axioms Reveal about Elasticities of Demand?

Published: September 4, 2013Pages: 16Keywords: Strong Axiom of Revealed Preference; Afriat Inequalities; Elasticities of DemandJEL-codes: C61; D12

What Do Revealed Preference Axioms Reveal about Elasticities of Demand? Per Hjertstrand and Barry E. Jones

It is well-known that observed data on prices and quantities of a set of goods is consistent with rational choice if the data satisfy revealed preference. In this paper, we derive estimators for demand and substitution elasticities at the observed data points for datasets satisfying the Strong version of the Strong Axiom of Revealed Preference (SSARP) from Chiappori and Rochet (1987). We find that these estimators are identified only up to a strictly positive parameter, which must be small enough that the utility function rationalizing the dataset satisfies certain properties.

We show that the estimated elasticities of substitution approach zero in the limit as this parameter approaches zero. Thus, if the dataset satisfies SSARP, then it is consistent with negligible substitutability between any pair of goods at all observed data points. Our estimators are derived directly from results in Brown and Shannon (2000) and Brown and Kannan (2005).

Per Hjertstrand


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Sick of Inequality?

An Introduction to the Relationship between Inequality and Health

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In this book Andreas Bergh, Therese Nilsson, IFN and Lund University, and Daniel Waldenström, IFN and Paris School of Economics, France, review the latest research on the relationship between inequality and health. What does inequality mean for our health? Does increasing income inequality affect outcomes such as obesity, life expectancy and subjective well-being?


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