An Excel Spreadsheet Numerical Example of a Giffen Good
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.
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
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
Giffen Good Excel Workbook (Excel 348kB Apr12 10)