Practicing Success
"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. |
Complementary goods Inferior goods Giffen goods Normal goods |
Giffen goods |
The correct answer is option (3) : Giffen goods 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. |