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An Excel Spreadsheet Numerical Example of a Giffen Good

This example was created by Humberto Barreto, DePauw University. It draws on material used in his book, Intermediate Microeconomics with Microsoft Excel, Cambridge University Press, 2009.
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This material is replicated on a number of sites as part of the SERC Pedagogic Service Project

Summary

This file enables a professor or student to use Excel to generate Giffen behavior. It provides a concrete example of a utility function that exhibits the paradoxical property that more of a good is purchased as its price rises, ceteris paribus. For every price increase, optimal consumption is tracked and it is obvious that an upward sloping demand curve is created.

Learning Goals

This example provides an opportunity to review these basic concepts in microtheory:
Utility maximization subject to a budget constraint (including the canonical indifference curve graph).
The marginal condition for optimality: MRS = p1/p2.
Comparative statics: changing an exogenous variable (p1), holding everything else constant, and tracking the response of optimal values of endogenous variables (x1* and x2*).
Giffen behavior: increasing x1* as p1 rises, ceteris paribus.
The behavior is true only for a range of values, Giffenness is a local phenomenon.

Context for Use

This simple example is ideally suited for an undergraduate Intermediate Microeconomics course. The professor can use computer projection to walk through the example or have students follow along in a computer lab. It can serve as a one-time example to give students a taste of Excel or as part of a course that uses Excel more frequently. The primary contribution is the utility function combined
with Solver to easily find optimal solutions at different prices. The content is standard and surely covered by every Micro course.
The example could also be used in a lower level, Introductory Economics class as an advanced topic. Since there is an analytical solution (using the Lagrangean Method), the example would also be suitable for an Advanced Micro or Math Econ course. The math is worked
out in the zip file available at www.depauw.edu/learn/microexcel.

Description and Teaching Materials

A step-by-step guide for using the example is provided in a sheet in the Excel workbook.
Giffen Good Excel Workbook (Excel 348kB Apr12 10)



Teaching Notes and Tips

Teaching notes for using the example are provided in a sheet in the Excel workbook.

Assessment

Student feedback during the presentation provides a measure of comprehension. Homework and exam questions can be used to assess student understanding.

References and Resources

References are provided in the Excel workbook.

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