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Giffen Indifference

In: Social Issues

Submitted By dowtoy
Words 2084
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The Giffen Indifference
By: Brett Dowling
October 20, 2012

100
100
Price ($)
Price ($)
Indifference Map: Bananas vs. Everything Else
Indifference Map: Bananas vs. Everything Else
Qev
Qev
Demand Graph: Bananas
Demand Graph: Bananas
Qb
Qb
60
60
50
50
40
40
20
20
12
12
5
5
2
2
Units
Units
12
12
2
2
5
5
5
5
10
10
20
20
In order to understand and create a Giffen Good indifference curve, one first must examine the elements Relating a Demand Schedule to an Indifference Curve
This demand graph depicts a survey relating the price of Bananas to the number of Bananas the sample would be willing to buy at that price. From this demand curve, we are able to create an indifference curve showing the maximizing relationships between the quantity of bananas we could buy (Qb) and the quantity of everything else we could buy (Qev), assuming one unit of everything else costs $1 and the budget is $100. How does this happen? When Qb = 2, the consumer would be willing to pay $20 for each banana, according to the demand curve. That means that $60 will be left over for everything else. Hence, a coordinate on the curve A of (2, 60) is formed as a point which maximized utility within the budget constraint. If the price of bananas were to be reduced to $10, then according to the demand curve, the consumer would be willing to buy 5, or $50 worth of bananas, and therefore $50 of everything else. This creates a new indifference curve, B, because the price change in bananas has caused your relative income to increase. Therefore the budget line pivots outward. The same logic can be used when creating curve C.
Relating a Demand Schedule to an Indifference Curve
This demand graph depicts a survey relating the price of Bananas to the number of Bananas the sample would be willing to buy at that price. From this demand curve, we are able to create an...

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