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Root Beer - PowerPoint PPT Presentation


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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. Root Beer. Quinine Water. (a) Initial Experiment.

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Presentation Transcript
slide1

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

slide2

Root Beer

Quinine Water

(a) Initial Experiment

(c) Price Experiment

(b) Income Experiment

units of measure
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
negatively sloped demand curve
Negatively Sloped Demand Curve

Price

Q(P, Income=110)

(b)

(a)

(c)

Q(P, Income=60)

Consumption

linear demand function

Linear Demand Function

Q = 10.1 - 0.63 Price + .03 Income

positively sloped demand curve
Positively Sloped Demand Curve

Price

Q(P, Income=110)

(a)

(b)

(c)

Q(P, Income=75)

Consumption

is the rat rational

Is the Rat Rational?

What Does it Mean?

slide14

Root Beer

Irrational

(a)

(c)

(b)

Quinine Water

Rational

is the rat rational1

Is the Rat Rational?

How Can We Tell?

slutsky equation

Slutsky Equation

Price Effect + Income Effect Weighted by Consumption = Substitution Effect

Substitution effect must be negative.