ECON 401 Chapter Notes - Chapter 8: Giffen Good, Substitute Good, Slutsky Equation

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18 Sep 2018

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ECON 401 Full Course Notes

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Giffen good: when a good"s price decreases and the demand decreases along with it. Apple farmer example: if the price of apples goes up, the demand might decrease for most consumers. But if the prices of apples goes up then the apple farmer will make more money and could possibly afford to consume more of his own apples. This means when the price of apples goes up, the farmers demand for apples might go up as well, making apples a giffen good. Two effects happen when the price of a good changes. Substitution effect: the change in the exchange rate between two goods. If good 1 one becomes cheaper, it means you have to give up less of good. The change in the price of good 1 had change the rate at which the market allows you to substitute good 2 for good 1. The trade-off between the two goods that the market presents the consumer has changed.

Related Questions

Consider the market for apples. The following graph shows the weekly demand for apples and the weekly supply of apples. Suppose a blight occurs that destroys a significant portion of apple crops.

Show the effect this shock has on the market for apples by shifting the demand curve, supply curve, or both.

One of the farmers is excited by the price increase caused by the blight because he believes it will increase revenue in this market. As an economics student, you can use elasticities to determine whether this change in price will lead to an increase or decrease in total revenue in this market.

Using the midpoint method, the price elasticity of demand for apples between the prices of $15 and $21 per bushel is (0.67,0.75,1.5,3) , which means demand is (elastic,inelastic,unit elastic) between these two points. Therefore, you would tell the farmer that his claim is (correct, incorrect) because total revenue will (decreases,increase) as a result of the blight.

Confirm your previous conclusion by calculating total revenue in the apple market before and after the blight.

purplewhale646

Respond True or False to the following, and explain why each answer is True or False:

a. If two goods x and y are perfect complements, then if the price of x falls, the entire change in demand for x is due to the income effect.

b. A consumer has the utility function given by U=min{x1,2x2}. If good 2, has a price of zero, the consumer will always strictly prefer more of good 2 to less.

c. Ivan spends his entire income on two goods. One of them is a Giffen good. If the price of the Giffen good rises, demand for the other good must fall.

d. Jimmy's utility function is U(a,b) = ab, where a is his consumption of apples and b is his consumption of bananas. If prices and income change in such a way that Jimmy's old consumption bundle lies on his new budget line, then Jimmy will not change his consumption bundle.

blueantelope865

1. Assume that beer is an inferior good for Wei. If the price of beer goes up, then the total effect results in Wei buying _______ beer and the substitution effect results in Wei buying ______ beer.

	a.	more, more
	b.	more, less
	c.	less, more
	d.	less, less
	e.	not enough information to determine

2. A consumer has preferences that are complete, transitive and satisfy the "more is better" property. Which of the following statements are necessarily true?

	a.	Indifference curves are negatively sloped.
	b.	Indifference curves do not cross.
	c.	Indifference curves exhibit diminishing marginal rates of substitution.
	d.	Both a) and b) are true.
	e.	a), b), and c) are true.

3. Suppose an individual has preferences over two goods - good X and good Y. In response to changes in the price of good X, the individual has a positively sloped price consumption curve, where good X is drawn on the horizontal axis. Which of the following statements is true?

	a.	Good Y is a normal good.
	b.	Good Y is a Giffen good.
	c.	Good Y is a complement for good X.
	d.	Good Y is an inferior good.
	e.	Good Y is a substitute for good X.

ECON 401 Chapter Notes - Chapter 8: Giffen Good, Substitute Good, Slutsky Equation

ECON 401 Full Course Notes

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