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Exploring the Consumption Effects of Root Beer and Quinine Water: Price and Income Dynamics

This study investigates the price and income effects on the consumption of root beer and quinine water, examining concepts closely tied to economic behavior such as Giffen goods and complement/substitute relationships. Through experiments involving different price points and serving sizes, we analyze how demand shifts in response to income changes and pricing strategies. The findings delve into rational vs. irrational consumer behavior and apply the Slutsky Equation to measure substitution and income effects, offering insights into consumer decision-making processes.

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Exploring the Consumption Effects of Root Beer and Quinine Water: Price and Income Dynamics

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  1. Root Beer A • B • • C D • • E • Quinine Water 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 (c) Price Experiment (b) Income Experiment

  3. 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

  4. Income Effect

  5. Price Effect

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

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

  8. Income Effect

  9. Price Effect

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

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

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

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

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

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