Question

Max prefers

Who-Hash to eggs, sausage and Spam

eggs, sausage and Spam to green eggs and ham

green eggs and ham to linguine and clams

linguine and clams to Who-Hash.

(a) What basic assumption about consumer preferences does this violate?

(b) Cindy-Lou tries to convince Max that he is irrational, but he insists that in each two-meal comparison above, the value of his more-preferred meal is at least $1 more than the value of his less-preferred meal. Advise Cindy-Lou on how she might make money by taking advantage of Max’s preferences.

Answer 1

Answer (a): Max’s preferences violate the base of the consumer preferability index. Max seem to be preferring one good over the other good, however, he contradicts his preference when in the first step Max prefers Who-Hash over eggs, sausage and Spam and in the last step he prefers linguine and clams to Who-Hash. Max’s preference is therefore irrational, as if A is greater than B and Bis greater than C then Cannot be greater than A.

Answer (b) : Cindy-Lou tried to convince Max of his irrational preference, but Max insisted and said that in each of his two-meal comparison, the value of his more-preferred meal is at least $1 more than the value of his less-preferred meal. In such a situation, Cindy-Lou will first present the meal Who-Hash in front of Max and tell him that the value of meal is x ( let x be $10 for comparison sake ) . Now, since Max has more preference for linguine and claims over Who-Hash & agrees and believes that Linguine and Clams will be at least $1 costlier than Who-Hash, therefore he will be ready to pay $11 for Linguine and Clams. Similarly, he will be ready to pay $12 for green eggs and ham. If Cindy- Lou presents the meals in backwards order, she will make more money by taking advantage of Max’s preferences.