Question

There are two goods, bananas and potatoes. The price of bananas increases and the price of potatoes decreases. If after the price change a consumer (whose preferences satisfy WARP) can still exactly afford her old consumption bundle, then she will consume at least as many potatoes as before, even if potatoes are a Giffen good.

True or False?

Answer 1

TRUE

WARP is one of the criteria which needs to be satisfied in order to make sure that the consumer is consistent with his preferences in consumption . If a bundle of goods a is chosen over another bundle b when both are affordable, then the consumer reveals that he prefers a over b .

Since potatoes are giffen good the fall in price will not lead to increase in consumption . The consumer will consume as many potatoes as before and will use the money saved to buy bananas which has increased in price .