Preferences and Demand
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Chapter 4 analyzes optimization and its implications for utility maximization subject to one or more constraints, and it develops the relationship between money income and the quantity consumed of a good. This chapter addresses the effects of changes in the good’s price. Such a change causes both the relative prices of the goods consumed and the consumer’s real income to change. Initially, analysis is based on the CES utility function. Then the analysis turns to the case of a Giffen good. A large amount of time is spent on the latter, not because of its inherent importance, but because it provides added insights into the nature of the consumer’s reaction to price and income changes.