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.

Question

Quizplus · Accepted Answer

If the price of bananas increases and the price of potatoes decreases, then the consumer's purchasing power has not changed. If the consumer can still afford her old consumption bundle, then she was already consuming the affordable combination of bananas and potatoes under the old prices. Since the consumer's preferences satisfy WARP, this means that she was not wasting any resources in her old consumption bundle.

If potatoes are a Giffen good (i.e. the demand for potatoes increases as the price of potatoes increases), then this means that the price decrease will lead to a decrease in potato consumption. However, if the consumer can still afford her old consumption bundle, then this means that the decrease in potato consumption will not be severe enough to prevent her from consuming at least as many potatoes as before. Therefore, the statement in the question is true.

There Are Two Goods, Bananas and Potatoes