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Home Publications Rationalizability, cost-rationalizability, and Afriat’s efficiency index

Rationalizability, cost-rationalizability, and Afriat’s efficiency index

Matthew Polisson and John Quah
IFS Working Paper W22/04

This note explains the equivalence between approximate rationalizability and approximate cost-rationalizability within the context of consumer demand. In connection with these results, we interpret Afriat’s (1973) critical cost efficiency index (CCEI) as a measure of cost (in)efficiency, in the sense that a consumer is spending more money than is required to achieve her utility targets.