Page 99 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes price income line or in any single price product. But it is possible there may be some more points on R
as Fig. 5.8 like A and B which is shown in circle and consumer is always unconcerned about it. If we
accept the criticisms of Armstrong then the base theorem of Samuelson can end. Suppose that the price
of X increases and the new budget line of consumer is now LS. Now give him some amount that he
can buy original combination point R on line PQ. Let’s assume in this new price income condition, he
selects point B below R. This is because Armstrong thinks that the consumer is unconcerned towards
the nearer already selected points. But to select B in PQ price income condition means consumer buys
more quantity of X when its price increases. Thus the base theorem of Samuelsson ends because if price
of X increases, the demand is more rather than short.
Second, according to Hicks since revealed preference theory is based on strong ordering, so it
cannot be assumed that all the points present in or out of triangle (OLM in our Fig. 5.8) describe the
good solutions. The strong ordering of a two dimensional continuum is not possible. So there is no
option to assume that the product comes in various units, so Fig. 5.8 can only be drawn in squared
paper and powerful options can only stable in the corner angles. Point R would also present in
square angle.

Fig. 5.8

P

L

Goods Y A R

B

O S Q M
Goods X

Third, the base theorem of Samuelson is conditional and not simple. This is based on the condition that
negative income elasticity is present within positive income elasticity. Since the income effect is created by
income and substitution effect, so in analysation point of view, the income effect cannot be separated from
substitution effect. If income effect is not positive then demand of price elasticity would be indefinite. On
the other hand, if income elasticity of demand is positive, then we cannot establish the substitution effect
due to changes in price. So the income effect and substitution effect cannot differentiate in Samuelson’s
theorem.
Fourth, the reveled preference theory of Samuelson has not given the solution of Giffen’s paradox
because it only studies on positive income elasticity of demand while Giffen’s paradox is related to
negative income elasticity. As per the demand theory of Marshall, the theorem of Samuelson is also not
differentiating between these two. The positive income effect of substitution effected Giffen’s product
while on the other hand, powerful substitution effected positive effect. Thus the theorem of Samuelson
is inferior and less working than the price effect of Hicks and Allen.

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