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Paul A. Samuelson
Economica, New Series, Vol. 15, No. 60. (Nov., 1948), pp. 243-253.
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Fri Aug 17 13:39:23 2007
Consumption Theory
actually bought. But they weren't. Hence, they are all " revealed "
to be inferior to A. No other line of reasoning is needed.
As yet we have no right to speak of " indifference ", and certainly
no right to speak of " indifference slopes
But nobody can object
to our summarising our observable information graphically by drawing
a little negative " slope element " a t each x and y point, with numerical
gradient equal to the price ratio in question.
".
194.81
C O K S U h Z P T I O N T H E O R Y I N TERMS O F R F V F A L E D PREFERENCE
245
".
246
ECONOMICA
[NOVEMBER
rigorous, even though it really goes back to at least the time of Euler.
In this method we approximate to our true solution .curve by a
connected series of straight line-segments, each line having the slope
dictated by the differential equation for the beginning point of the
straight line-segment in question. This means that our differential
equation is not perfectly satisfied at all other points ; but if we make
our line-segments numerous and short enough, the resulting error from
the true solution can be made as small as we please.
Figure 2 illustrates the Cauchy-Lipschitz approximations to the
true solution passing through the point A (10,30) and going from
x= 10, to the vertical line x = 15. The top smooth curve is the true
unitary-elasticity curve that we hope to approximate. The three
lower broken-line curves are successive approximations, improving
in accuracy as we move to higher curves.
Our crudest Cauchy-Lipschitz approximation is to use one linesegment for the whole interval. We pass a straight line through A
with a slope equal to the little arrow at A, or equal to - 3. This is
nothing but the familiar budget line through the initial point A ; it
intersects the vertical line x = 15, at the value y = 15 or at the point
marked Z'.'
(Actually, from the economic theory of index numbers and consumer's choice, we know that this first crude approximation Z' : (x, y)
= (15, 15) clearly revealed itself to be " worse " than (x, y) = (10,30)
-since the former was actually chosen over the latter even though
both cost the same amount. This suggests that the Cauchy-Lipschitz
process will always approach the true solution curve, or " indifference
curve ",from below. This is in fact a general truth, as we are about
to see.) Can we not get a better approximation to the correct solution
than this crude straight line, AZ' ? Yes, if we use two line-segments
instead of one. As b e f ~ r elet us first proceed on a straight line through
A with slope equal to A's little arrow. But let us travel on this line
only two-fifths as far as before : to x = 12, rather than x= 15. This
gives us a new point B' (12, 24), whose directional arrow is seen to
have the slope of - 2. Now, through B' we travel on a new straight
line with this new slope; and our second, better, approximation to
the true value at x = 15, is given by the new intersection, Z", with
the vertical line, at the level y = 18. (The " true " value is obviously
at Z on the smooth curve where y must equal 20 if we are to be on
the hyperbola with the property xy= 10 x 30= 15 x 20; and our
second approximation has only $ the error of our first.)
The general procedure of the Cauchy-Lipschitz process is now clear.
Suppose we divide the interval between x = 10 and x = 15 into 5 equal
segments ; suppose we follow each straight line with slope equal to
its initial arrow until we reach the end of the interval, and then begin a
new straight line. Then as our numerical table shows, we get the still
A Numerical Appendix gives the exact arithmetic underlying this and the following
figure.
248
ECONOMICA
[NOVEMBER
We have really proved only one thing so far : all points below the
true mathematical solution passing through an initial point, A, are
definitely " revealed to be worse " than A.
We have not rigorously proved that points falling on the solution
contour curve are really " equal " to A. Indeed in terms of the strict
algebra of " revealed preference " we have as yet no definition of
what is meant by " equality " or " indifference ".
Still it would be a great step forward if we could definitely prove
the following: all points above the true mathematical solution are
definitely " revealed to be better " than A.
The next following section gives a direct proof of this fact by defining
a new process which is similar to the Cauchy-Lipschitz process and
which definitely approximates to the true integral solution f r o m above.
But it may be as well to digress in this section and show that by indirect
reasoning like that of Mr. Little, we may establish the proposition
that all points above the solution-contour are clearly better than A.
I shall only sketch the reasoning. Suppose we take any point just
vertically above the point Z and regard it as our new initial point.
The mathematician assures us that a new " higher " solution-contour
goes through such a point. Let us construct a Cauchy-Lipschitz process
leftward, or backwards. Then by using small enough line-segments we
may approach indefinitely close to that point vertically above A which lzes
on the new contour line above A's contour. A will then have to lie below
the leftward-moving Cauchy-Lipschitz curve, and is thus revealed to be
worse than any new initial point lying above the old contour line. Q.E.D.
We may follow Mr. Little's terminology and give the name " behaviour
line" to the unique curve which lies between the points definitely
shown to be better than A, and those definitely shown to be worse
than A. This happens to coincide with the mathematical solution to
the differential equation, and we may care to give this contour line,
by courtesy, the title of an indifference curve.l
1 If our preference field does not have simple concavity-and
why should it ?-we may observe
cases where A is preferred to B a t some times, and B to A a t others. If this is a pattern of
consistency and not of chaos, we could choose to regard A and B as "indifferent " under those
circumstances. If the preference field has simple concavity, " indifference " will never explicitly
reveal itself to us except as the rcs~llts of an infinite limiting process.
Our new process will consist of broken straight lines ; and in the
limit these will become numerous enough to approach a smooth curve.
But the slopes of the straight line-segments will not be given by their
initial points, as in the Cauchy-Lipschitz process. Instead, the slope
will be determined by t h e j n a l point of the sub-interval's line-segment.
After the reader ponders over this for some time and considers its
geometrical significance, he may feel that he is being swindled. How
can we determine the slope at the line's final point, without first
determining the final point ? But, how can we know the final point
of the line unless its slope has already been determined ? Clearly, we
are a t something of a circular impasse. To determine the slope, we
seem already to require the slope.
The way out of this dilemma is perfectly straightforward to anyone
who has grasped the mathematical solution of a simultaneous equation.
The logical circle is a virtuous rather than a vicious one. By solving the
implied simultaneous equation, we cut through the problem of circular
interdependence. And in this case we do not need an electronic computer to solve the implied equation. Our human guinea-pig, simply by
following his own bent, inadvertently helps to solve our problem for us.
I n Figure 3, we again begin with the initial point A. Again we
wish to find the true solution for y at x = 15. Our first and crudest
approximation will consist of one straight line. But its slope will
be determined at the end of the interval and is initially unknown.
Let us, therefore, through A swing a straight line through all possible
angles. One and only one of these slopes will give us a line that is
exactly tangent to one of the little arrows at the end of our interval.
Let Z' be the point where our straight line is just tangent to an arrow
lying in the vertical line. It corresponds to a y value of 22&, which is
above the true value of y = 20.
Economically speaking, when we rotate a straight " budget line"
around an initial point A, and let the individual pick the best combi-pation of goods in each situation, we trace out a so-called " offer curve ".
This curve is not drawn in on the figure, but the point Z' is the intersection of the offer curve with the vertical line. I t should be obvious
from our earlier reasoning that 2' and any other point on the offer
curve is revealed to be better than A, since any such equal-cost point
is chosen over A.
So much for our crude first approximation. Let us try dividing the
interval between x = 10 and x = 15 up into two sub-intervals so that
two connected straight lines may be used. If we wish the first line
to end at x = 12, we rotate our line through A until its final slope is
just equal to the indicated little arrow (or price ratio) along the vertical
line x= 12. For the simple hyperbole in question, where - p,/p,=
dy- - y/x, our straight line will be found to end at the point B", whose
dx-
( x , y) coordinates are (12, 25$) and whose arrow has a slope of just
less than (- 2).
We now begin at B" as a new initial point and repeat the process
by finding a new straight line over the interval from x= 1 2 to x = 15.
Pivoting a line through all possible angles, we find tangency only at
the point Z", where y = 21?, which is a still better approximation to
the true value, y= 20.
The interested reader may easily verify that using more sub-intervals
and intermediate points will bring us indefinitely close to the true
solution-contour.1 I t is clear therefore that our new process brings
us to the true solution in the limit, but unlike the Cauchy-Lipschitz
process, it now approaches the solution from above. And we can use
the word " above " in more than a geometrical sense. Along the
new process lines, the individual is revealing himself to be getting
better off. For just as A is inferior to Z', it is by the same reasoning
inferior to B", which is likewise inferior to Z" ; from which it follows
that A is inferior to Z".
I t should be clear, therefore, that no matter how many intermediate
points there are in the new process, the consumer none the less reveals
himself to be travelling uphill. I t follows that every point above the
mathematical contour line can reveal itself to be better than A.
This essentially completes the present demonstration. The mathematical contour lines defined by our differential equation have been
proved to be the frontier between points revealed to be inferior to
A, and points revealed to be superior. The points lying literally on a
(concave) frontier locus can never themselves be revealed to be better
or worse than A. If we wish, then, we may speak of them as being
indifferent to A.
The whole theory of consumer's behaviour can thus be based upon
operationally meaningful foundations in terms of revealed p r e f e r e n ~ e . ~
He m a y verify that using the points x == 10,11, 1 2 , 13, 14, 15 brings us to within ot
zo, as shown in the second table of the Numerical Appendix.
The above remarks apply without qualification to two dimensional problems where the
problem of "integrability" cannot appear. In the multidimensional case there still remain
some problems, awaiting a solution for more than a decade now.
252
[NOVEMBER
ECONOMICA
NUMERICAL
APPENDIX
In the Cauchy-Lipschitz process, the straight line going from (xo, yo)
to (x,, y,) is defined by the explicit equation
(0)
Y0
y = y o - f ( ~ 0 ,~ o ) ( x - x o ) = ~ o - - ( x - x o )
X0
First Approximation
initial point
30 - 3 (15 - lo)=
10
15
Second Approximation
initial point
30-3(12-10)24- 2 (15 - IZ)=
10
I2
15
30
- 30/1o=
-3
- 30/10=
- 24/12=
-3
15
30
24
I8
-2
Third Approximation
initial point
(4 Y l = ~ o - f ( ~ l ~ ~ l ) ( ~ l - ~ o )
10
First Appvoximation
initial point
10
Second Approximation
initial ~ o i n t
10
Third Approximation
initial point
30
[In Figure 3, the point between A and Z" should be labelled B"].