1. 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

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

4. 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

5. Income Effect

6. Price Effect

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

8. Linear Demand Function Q = 10.1 - 0.63 Price +.03 Income

10. Income Effect

11. Price Effect

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

13. Is the Rat Rational? What Does it Mean?

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

15. Is the Rat Rational? How Can We Tell?

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