Rationalizability, Cost-Rationalizability, and Afriat's Efficiency Index

TL;DR

This paper clarifies the relationship between approximate rationalizability and cost-rationalizability in consumer demand, interpreting Afriat's CCEI as a measure of cost inefficiency and rationalizability.

Contribution

It establishes the equivalence between approximate rationalizability and cost-rationalizability and offers a new interpretation of Afriat's CCEI as a cost inefficiency measure.

Findings

Equivalence between approximate rationalizability and cost-rationalizability.

Afriat's CCEI measures the degree of cost inefficiency in consumer behavior.

Interpretation of CCEI as a rationalizability measure.

Abstract

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 approximate rationalizability through cost inefficiency, in the sense that an agent is spending more money than is required to achieve her utility targets.