Suppose the price of a Giffen good, X, decreases. In this case, the substitution effect states that the consumer purchases _____ of good X, and the total effect is _____ in consumption of good X.

Question

Quizplus · Accepted Answer

For a Giffen good, when the price decreases, the substitution effect leads consumers to buy more of the good because it becomes relatively cheaper compared to other goods. However, the income effect (which dominates in the case of Giffen goods) causes consumers to buy less of the good overall, as they no longer need to spend as much of their income to afford the good, leading to a decrease in consumption.

Suppose the Price of a Giffen Good, X, Decreases