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(In this question we denote income by Y, not by W as in the lecture notes). The following figure shows a two-good consumption space for an agent. The horizontal axis measures good x and the vertical axis measures good y. There are three budget lines shown in the figure. The first budget line has vertical intercept Y/py and horizontal intercept Y/px. The second budget line has vertical intercept Y/p’y<Y/py, and horizontal intercept Y/px. The third budget line has vertical intercept Y/py, and horizontal intercept Y/p’x< Y/px. There are two indifference curves. These are downward sloping thin curves that do not touch. One of this curves intersects the first budget line only at bundle (3,2). The other curve intersects the second budget line only at (4,0.6) and intersects the third budget line only at (1,2.5).

Can we conclude that good y is a Giffen good for some market situation?




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Y Py 2.5 (3,2) Y Py 0.6 4

Step 1

Giffen goods are the special cases of inferior goods in which...

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