3) (1 BONUS pt.) Susan grows 100 potatoes each year and all of her income comes

Question

3) (1 BONUS pt.) Susan grows 100 potatoes each year and all of her income comes from selling them. She spends all of her income each year consuming potatoes and other goods. For Susan, potatoes are a Giffen good, in that if her income is fixed in some way (i.e. ignoring the fact that she sells potatoes and just fixing her income at some value her consumption of potatoes will rise when their price rises. The price of potatoes falls and she consumes more potatocs. Taking into account the fact that her income actually comes fro seling potatoes:

Explanation / Answer

1) In the given scenario, the quantity demanded rises with a fall in price of potatoes. The reason for it is due to the Susan’s income which he derives from selling the potatoes. When the quantity she sells is fixed at 100, a decline in the price of potatoes signifies a decline in Susan’s income. For giffen goods, the quantity demanded increases when income declines due to the negative income effect. In the given scenario, the quantity demanded by Susan increases because of a decline in her income is more than offsets the decrease due to the fall in price

2) Giffen goods are always inferior goods; and when the price of inferior good declines, the consequence will be a rise in the quantity demanded because of significant negative income effect. In the given scenario the potatoes are a Giffen good for Susan, thus we would expect the quantity demanded to decrease when the price decreases. Moreover inferior goods have strong positive substitution effect

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