Question from Past Microeconomics Qualifying ExamEdit
Spring 2006 - Section I, Question three, George Mason University
T, F, U. State first whether the following statements are true, false or uncertain. Then briefly explain your reasoning in four or five sentences. You may use a graph if it helps clarify your answer.
If Farmer Brown increases his consumption of potatoes when the price of potatoes goes up, then we can conclude that potatoes are a Giffen good for Farmer Brown.
True. A giffen good is characterized by a positive price elasticity of consumption over some range, i.e. if the price of the giffen good goes up it will be consumed in a larger quantity and vice versa. The prerequisit for a good to be a Giffen good is usually that the consumption of it represents a large fraction of a persons income. Giffen goods are usually not observed empirically.
- Shouldn't this be Uncertain because the question does not specify the quality of the potatoes before and after? Nor does it specify the relative price of potatoes to other goods in the market. Therefore, he may eat more because they are of higher quality. Or, he may eat more because potatoes have experienced less inflation than other goods. Lastly, he may be purchasing potatoes speculatively, hoping the price will continue to rise faster than the prices of other goods.
Should be true because the question is about the price of potatos and not the farmers income. If it was income that was rising and potato consumption is falling, then we would have envoked changing preferences (low carbs consumption, Atkins diet, etc.), or, higher quality potatos, like in the children case
False. The price of potatoes would have to be up relative to the good farmer's income and the price of other goods. On the information provided alone, we cannot conclude that the good in question is a Giffen good.
False, it's the endowment effect not a giffen good, with a giffen good it is inferior and a large part of the consumers income is spent on it. So the income effect swamps out the substitution effect.