5.2. CHANGE IN THE PRICE OF A GOOD: SUBSTITUTION EFFECT AND
INCOME EFFECT. 153. In another experiment, rats were offered a similar.
Microeconomia David A. Besanko, Ronald R. Braeutigam Copyright © 2009 – The McGraw-Hill Companies srl
5.2
Microeconomia 2/ed David A. Besanko, Ronald R. Braeutigam © 2012 McGraw-Hill
CHANGE IN THE PRICE OF A GOOD: SUBSTITUTION EFFECT AND INCOME EFFECT
153
What about the demand curve for food in the case illustrated by Figure 5.9? When the price of food drops from Px1 to Px2 , the quantity of food actually decreases from x A to xC , so the demand curve for food will be upward sloping over that range of prices. A Giffen good has a demand curve with a positive slope over part of the curve. As we have already noted, some goods are inferior over some price ranges for some consumers. For instance, your consumption of hot dogs may fall if your income rises, because you decide to eat more steaks and fewer hot dogs. But expenditures on inferior goods typically represent only a small part of a consumer’s income. Income effects for individual goods are usually not large, and the largest income effects are usually associated with goods that are normal rather than inferior, such as food and housing. For an inferior good to have an income effect large enough to offset the substitution effect, the income elasticity of demand would have to be negative and the expenditures on the good would need to represent a large part of the consumer’s budget. Thus, while the Giffen good is intriguing, it is not of much practical concern.
A P P L I C A T I O N
5.3
Rats Respond When Prices Change! In Chapter 2 we cited studies showing that people have negatively sloped demand curves for goods and services and that many goods are adequate substitutes for one another. In the early 1980s several economists conducted experiments designed to show how rats would respond to changes in relative prices. In one famous experiment, white rats were offered root beer and collins mix in different containers. To extract a unit of the beverage, a rat had to “pay a price” by pushing a lever a certain number of times. The researchers allowed the rat a specified number of pushes per day. This was the rat’s income. Each rat was then able to choose its initial basket of the beverages. Then the experimenters altered the relative prices of the beverages by changing the number of times the rat needed to push the lever to extract a unit of each beverage. The rat’s income was adjusted so that it would allow a rat to consume its initial basket. The researchers found that the rats altered their consumption patterns to choose more of the beverage with the lower relative price. The choices the rats made indicated that they were willing to substitute one beverage for the other when the relative prices of the beverages changed. 7
In another experiment, rats were offered a similar set of choices between food and water. When relative prices were changed, the rats were willing to engage in some limited substitution toward the good with the lower relative price. But the cross-price elasticities of demand were much lower in this experiment because food and water are not good substitutes for one another. In a third study, researchers designed an experiment to see if they could confirm the existence of a Giffen good for rats. When the rats were offered a choice between quinine water and root beer, researchers discovered that quinine water was an inferior good. They reduced the rats’ incomes to low levels, and set prices so that the rats spent most of their budget on quinine water. This was the right environment for the potential discovery of a Giffen good. Theory predicts that we are most likely to observe a Giffen good when an inferior good (quinine water) also comprises a large part of a consumer’s expenditures. When researchers lowered the price of quinine water, they found that the rats did in fact extract less quinine water, using their increased wealth to choose more root beer. The researchers concluded that for rats, quinine water was a Giffen good.7
See J. Kagel, R. Battalio, H. Rachlin, L. Green, R. Basmann, and W. Klemm, “Experimental Studies of Consumer Demand Behavior,” Economic Inquiry (March 1975, pp. 22–38); and J. Kagel, R. Battalio, H. Rachlin, and L. Green, “Demand Curves for Animal Consumers,” Quarterly Journal of Economics (February 1981, pp. 1–16); and R. Battalio, J. Kagel, and C. Kogut, “Experimental Confirmation of the Existence of a Giffen Good,” American Economic Review (September 1991, pp. 961–970).
