A Convenient Utility Function with Giffen Behaviour

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.

Demand and equilibrium with inferior and Giffen behaviors

“…Here, we just mention two recent papers (Haagsma, 2012;Biederman, 2015). Haagsma (2012) presents a separable utility function generating Giffen behavior.…”

“…2 In this example, the consumption set is restricted (precisely, it is (γ 1 , ∞) × [0, γ 2 ) with γ 1 > 0, γ 2 > 0) and the utility function is quasi-concave but not concave. Moreover, in Haagsma (2012), the good 1 demand c 1 is always decreasing in the income, denoted by w, whatever the prices and the consumer's income. However, in our model, the sign of ∂c 1 ∂w depends on the prices and the consumer's income.…”