A Giffen good is a good for which a price increase leads to higher quantity demanded because the:
Correct answer: C. Negative income effect exceeds the substitution effect
- A. Substitution effect is stronger than the income effect
- B. Positive income effect exceeds the substitution effect
- C. Negative income effect exceeds the substitution effect
- D. Demand curve shifts right after the price increase
Explanation
For a Giffen good, the negative income effect caused by the higher price is unusually strong and outweighs the substitution effect. This produces an upward relationship between price and quantity demanded over the relevant range.
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About Microeconomics
Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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