For a Giffen good:
A)the income effect is positive and is dominated by the substitution effect
B)the income effect is negative and dominates the substitution effect
C)the income effect is positive and dominates the substitution effect
D)the income effect is negative and is dominated by the substitution effect

Question

Quizplus · Accepted Answer

For a Giffen good, the income effect is negative (as the price increases, the consumer's real income decreases, leading them to consume less of all goods). However, the substitution effect is weaker than the income effect, meaning that despite the price increase, the consumer still consumes more of the Giffen good. Therefore, the income effect dominates the substitution effect.

For a Giffen Good