Root Beer

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# Root Beer - PowerPoint PPT Presentation

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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## PowerPoint Slideshow about 'Root Beer' - catherine-blackwell

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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

(c) Price Experiment

(b) Income 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
Negatively Sloped Demand Curve

Price

Q(P, Income=110)

(b)

(a)

(c)

Q(P, Income=60)

Consumption

### Linear Demand Function

Q = 10.1 - 0.63 Price + .03 Income

Positively Sloped Demand Curve

Price

Q(P, Income=110)

(a)

(b)

(c)

Q(P, Income=75)

Consumption

### Is the Rat Rational?

What Does it Mean?

Root Beer

Irrational

(a)

(c)

(b)

Quinine Water

Rational

How Can We Tell?

### Slutsky Equation

Price Effect + Income Effect Weighted by Consumption = Substitution Effect

Substitution effect must be negative.