Root Beer Quinine Water C D E A B A-B: Irrational Behavior B-C: Positive Price Effect (Giffen Good) C-D: Negative Price Effect / Gross Complements D-E:

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Presentation transcript:

Root Beer Quinine Water C D E A B A-B: Irrational Behavior B-C: Positive Price Effect (Giffen Good) C-D: Negative Price Effect / Gross Complements D-E: Negative Price Effect / Gross Substitutes

Root Beer Quinine Water (a) Initial Experiment (b) Income Experiment (c) Price Experiment

Units of Measure Price = $ / unit Presses are rat $ Serving size per press = units / $ = 1 / Price.05 cc/press => 20 presses / unit.1 cc/press => 10 presses / unit.15 cc/press => 6.7 presses /unit

Income Effect

Price Effect

Negatively Sloped Demand Curve Price Consumption Q(P, Income=110) Q(P, Income=60) (a)(b) (c)

Linear Demand Function Q = Price +.03 Income

Income Effect

Price Effect

Positively Sloped Demand Curve Price Consumption Q(P, Income=110) Q(P, Income=75) (a) (b) (c)

Is the Rat Rational? What Does it Mean?

Root Beer Quinine Water (b) (c) (a) Rational Irrational

Is the Rat Rational? How Can We Tell?

Slutsky Equation Price Effect + Income Effect Weighted by Consumption = Substitution Effect Substitution effect must be negative.

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