Revealed Preference Theory Analysis

This solution analyzes the two statements regarding the Revealed Preference Theory.

Statement I: Income Elasticity of Demand

Revealed Preference Theory models consumer choice based on observed actions rather than subjective utility. The theory itself does not inherently impose a restriction that income elasticity *must* be positive. However, it is consistent with the existence of normal goods, for which income elasticity is positive (i.e., demand increases as income rises). The theory's framework allows for the derivation and analysis of demand curves that exhibit positive income effects.

Statement II: Consumer Preferences and Strong Ordering

The foundation of Revealed Preference Theory lies in the consistency of consumer choices. Axioms such as the Weak Axiom of Revealed Preference (WARP) and the Strong Axiom of Revealed Preference (SARP) formalize this consistency. These consistency conditions align with the core assumptions of rational choice, specifically transitivity. Rational preferences, characterized by completeness and transitivity, are often referred to as satisfying a 'strong ordering'. Therefore, choices that are consistent with Revealed Preference Theory inherently reflect preferences that satisfy strong ordering.

Conclusion

Based on the analysis:

• Statement I is considered true as the theory accommodates normal goods with positive income elasticity.
• Statement II is true because the consistency axioms of the theory are built upon the principles of rational preferences, which constitute a strong ordering.

Since both statements are accurate within the context of Revealed Preference Theory, the correct conclusion is that both are true.