Imelda consumes shoes and a composite of all other goods. For Imelda, the income

Question

Imelda consumes shoes and a composite of all other goods. For Imelda, the income effect of a change in the price of shoes is always zero. Imeldas preferences satisfy all of the usual assumptions (i.e. completeness, nonsatiation, transitivity, and convexity). Initially, Imelda consumes 4 units of shoes and 3 units of other goods. I describe this bundle with the coordinates (4,3).

Does Imelda’s demand for shoes provide an example of a Giffen good? Select the correct answer, and explain why.

a) Yes.
b) No.
c) Yes, but only if the unit price of shoes is greater than that of other goods.
d) Yes, but only if Imelda spends more on shoes than on other goods.
e) There is not enough information to tell.

Explanation / Answer

A giffen good is a good that one consumes relatively more of if they lose income. Think of this as the price rises and you buy more of the good. This phenomena happens very rarely in instances like the Irish potato famine where the price of potatoes went up, but people bought more because the potato was the only food they could now afford. Back to your question, the answer is no. Based on these standard preferences there is no reason to suspect a giffen good. Completeness means that the buyer has a preference for each bundle. Nonsatiation means that the consumer believes that they will always be better off with more of a good. Convexity means that income left will decrease as you purchase either good. Thus, from the information given, there is no reason to believe that the good is a giffen good.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.