In case of goods where the income effect is stronger than substitution effect, the demand for the good would be positively related to its price, Such a good is called a _ _ _ _ _ _ _ _

Giffen good

The correct answer is option (3) : Giffen good

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.

• A Giffen good is a special type of inferior good where the income effect is stronger than the substitution effect, and both effects work in opposite directions.

• When the price of a Giffen good increases, the negative income effect dominates, leading to an increase in quantity demanded, which is a violation of the law of demand.

So, demand is positively related to price — as price rises, demand also rises.