Main grounds on which revealed preference theory is criticized are given below:
Grounds
1. Possibility of Indifference cannot be ruled out:
Samuelson theory is based upon strong-ordering and preference hypothesis. Strong-ordering rejects indifference hypothesis.
But in fact there can be some combinations on the price line, chosen combination between which the consumer may be indifferent.
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It is also argued that if preference is to be judged from a large number of combinations, then the possibility of indifference cannot be ruled out altogether. Prof. Hicks has argued that weak-ordering is better than strong ordering.
Furthermore, if utility is comparable only and not quantifiable, then the possibility of indifference will certainly be there.
Prof. T. Majumdar has remarked and rightly too that all forms of welfare theory assume that an individual can always compare his ends. Therefore, possibility of indifference is there.
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2. Unrealistic assumption of positive income elasticity of demand:
Samuelson derives his demand theorem by assuming positive income elasticity of demand. Since income effect can be negative, therefore, income elasticity of demand can also be negative.
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Thus, this theory cannot explain consumer demand in such cases where income elasticity of demand is negative.
It cannot explain the direction of change in demand due to change in price when income effect is negative. Owing positive income elasticity of demand it fails to explain the ‘Giffen Paradox’.
3. Does not recognize substitution effect:
Revealed preference theory has ruled out the possibility of indifference and owing to this he does not recognize substitution effect.
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According to this theory the consumer chooses only one combination of goods in every price-income situation because it is based upon preference hypothesis. But in fact price effect is the composite effect of income effect and substitution effect.
In conclusion we can say that the superiority of Samuelson lies in using behaviouristic method to analyze consumer behaviour and enunciation of preference hypothesis.