"If the negative Income effect is stronger than the positive substitution effect, the demand for the good will be positively related to its price". Identify the type of good.

Giffen goods

The correct answer is option (3) : Giffen goods

Normally, when price of a good rises, people buy less of it — this is called the law of demand.
But for Giffen goods, something strange happens: when price rises, people buy more of that good! Why?
Because two effects happen when price changes:

• Substitution Effect: If price rises, normally people buy less of that good and shift to other goods.

• Income Effect: When price rises, it feels like their income has reduced (they feel poorer).

In case of Giffen goods (like cheap food items — very basic ones),

• The negative income effect (feeling poorer and buying even more of the cheaper basic good) is stronger than

• The substitution effect (which normally reduces demand).

As a result, demand increases even when price increases — that's why Giffen goods show a positive relationship between price and quantity demanded.

NCERT : "A rise in the purchasing power (income) of the consumer can sometimes induce the consumer to reduce the consumption of a good. In such a case, the substitution effect and the income effect will work in opposite directions. The demand for such a good can be inversely or positively related to its price depending on the relative strengths of these two opposing effects. If the substitution effect is stronger than the income effect, the demand for the good and the price of the good would still be inversely related. However, if the income effect is stronger than the substitution effect, the demand for the good would be positively related to its price. Such a good is called a Giffen good."