A-B: Irrational Behavior

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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
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(a) Initial Experiment
(c) Price Experiment
(b) Income Experiment
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Units of Measure

• Price / unit
• Presses are rat
• Serving size per press units / 1 / Price
• .05 cc/press gt 20 presses / unit
• .1 cc/press gt 10 presses / unit
• .15 cc/press gt 6.7 presses /unit

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Income Effect
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Price Effect
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Negatively Sloped Demand Curve
Price
Q(P, Income110)
(a)
(b)


(c)

Q(P, Income60)
Consumption
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Linear Demand Function

• Q 10.1 - 0.63 Price .03 Income

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Income Effect
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Price Effect
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Positively Sloped Demand Curve
Price
Q(P, Income110)
(a)
(b)


(c)
Q(P, Income75)

Consumption
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Is the Rat Rational?

• What Does it Mean?

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Is the Rat Rational?

• How Can We Tell?

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Slutsky Equation

• Price Effect Income Effect Weighted by
  Consumption Substitution Effect
• Substitution effect must be negative.