Economics • Economic BasicsMedium
How does the 'Giffen Good' paradox challenge the standard law of demand in microeconomics?
A. An increase in consumer income leads to a decrease in the quantity demanded of the luxury commodity
B. An increase in the price of the inferior necessity causes an increase in the quantity demanded due to a dominant negative income effect✓ Correct Answer
C. A decrease in the price of a substitute good causes an expansion in the demand for the primary good
D. The price elasticity of supply becomes perfectly inelastic regardless of changes in market price
💡 Solution & Explanation
A Giffen good is a heavily consumed inferior good for which the negative income effect outweighs the substitution effect, causing consumers to buy more of it when its price rises. Normal inferior goods still obey the law of demand because the substitution effect always dominates the income effect. Robert Giffen originally observed this behavior among staple food items consumed by low-income households during periods of economic distress.
More Economics Economic Basics questions
- In macroeconomics, what does the 'Multiplier Effect' measure?
- What does the 'Tobin's q' ratio measure in investment economics?
- What does 'Consumer Price Index (CPI)' measure?
- Which of the following curves shows the combinations of two goods that give a consumer equal levels of…
- Which of the following describes the condition of 'X-Inefficiency' introduced by Harvey Leibenstein in…