Root Beer

Quinine Water

C

D

E

A

B

•

•

••

•

A-B: Irrational BehaviorB-C: Positive Price Effect (Giffen Good)C-D: Negative Price Effect / Gross ComplementsD-E: Negative Price Effect / Gross Substitutes

•

Root Beer

Quinine Water

(a) Initial Experiment

(b) Income Experiment

(c) Price Experiment

Trials Income(total presses allowed

each session)Quinine Root Beer Quinine Root Beer

(a) 110 .1cc .05cc 7.52 1.74(b) 60 .1cc .05cc 5.80 0.10(c) 60 .15cc .05cc 7.89 0.37

Tables 1 & 2: The Trials of Rat 541Price Quantity Consumed

(amount dispensed for each press)

(in cc's)

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

Consumption

Income

580 7 52

60 1100 03

. ..

Price Effect

Consumption

Price

7 89 580

6 7 1063

. .

..

Negatively Sloped Demand Curve

Price

Consumption

Q(P, Income=110)

Q(P, Income=60)

•

•

•(a)(b)

(c)

Linear Demand Function

Q = 10.1 - 0.63 Price + .03 Income

Trials Income

(total presses allowed each session)

Quinine Root Beer Quinine Root Beer

(a) 110 .1cc .05cc 3.9 (39) 3.55 (71) (b) 75 .1cc .05cc 5.9 (59) 0.8 (16) (c) 75 .15cc .05cc 4.7 (31) 2.2 (44)

Tables 1 & 2: The Trials of Rat 543

Quantity Consumed

(amount dispensed for each press)

(in cc's; presses in parentheses)

Price

Income Effect

Consumption

Income

5 9 3 9

75 1100 06

. ..

Price Effect

Consumption

Price

4 7 5 9

6 7 1036

. .

..

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.