You own a fresh vegetable stand. Last week you decided to raise your carrot pric

Question

You own a fresh vegetable stand. Last week you decided to raise your carrot prices from 79 cents per bunch to 99 cents per bunch. Subsequently, you noticed that several of your regular customers were buying 2 bunches instead of their usual one. In fact, your carrot sales had gone up appreciably. When you finally asked one of your customers why she was buying so many carrots, she replied, “My neighbor told me that you had recently raised your price because carrots were in short supply, and that I ought to stock up before you ran out.” Does this contradict the law of demand? Why or why not? Justify your answer.

Explanation / Answer

This does contradict the law of demand. In normal cases, when the price of a normal good rises, wuantity demanded falls. However, there are cases, as in this one where the good is an inferior good and makes up a majority of the consumers purchases. In this case, when the price rises, the consumer buys more. This is known as a giffen good. Hope this helps

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