Abstract

The paper proposes a simple utility function that can generate Giffen behaviour. The function suggests an alternative direction where Giffen behaviour can be found and also implies a convenient framework for empirical testing. Moreover, because of its simple form, the utility function is well-suited for teaching purposes.

Highlights

  • It was not until the third [1, 2] edition of his Principles that Alfred Marshall stated that the law of demand may not always hold

  • The proposed utility function suggests that Giffen behaviour can be found in the presence of activities that damage one’s health, but the desire for which increases as an activity proceeds

  • It is clear that this explanation considerably differs from the “Giffen paradox.”

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Summary

Introduction

It was not until the third [1, 2] edition of his Principles that Alfred Marshall stated that the law of demand may not always hold. (“(A)s Mr Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it Such cases are rare; when they are met with they must be treated separately” ([1], page 208; [2], pages 109, 110).) The precise meaning of this paragraph has kept the minds of many economists occupied for more than a century, as has the more general issue of the possibility of an upward sloping segment of the demand curve (see, [3,4,5,6,7,8]). The derivation of demand curves and the evaluation of income and price effects can be done in the usual way, and the convexity of the indifference curves is verified

A Simple Utility Function with the Giffen Property
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