Measuring Consumer Inconsistency: Real Income, Revealed Preference and the Slutsky Matrix

Michael Jerison and David Jerison

Discussion Papers from University at Albany, SUNY, Department of Economics

Abstract: If a smooth consumer demand function violates the strong axiom of revealed preference, then income and prices can follow a cycle and return to their starting values even though real income has always risen. We show how real income growth along the "worst" revealed preference cycle depends on the range of price variation and on violations of the Slutsky conditions. We use this result to justify a new index of local demand inconsistency. We also relate the result to proposed reforms of the consumer price index, and we provide a bound on the number of observations required to form a revealed preference cycle.

Date: 1999
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