Economists Robert Jensen and Nolan Miller reasoned that to be a Giffen good, with an income effect larger than its substitution effect, a good must be ________ and make up a ________ portion of a consumer's budget.
A)a normal good; very small
B)an inferior good; very small
C)a normal good; very large
D)an inferior good; very large

Question

Quizplus · Accepted Answer

Giffen goods are rare and inferior goods with limited substitutes. When the price of an inferior good increases, individuals' budget constraints become more stringent. They have less money to spend overall, and the price increase may also encourage them to buy more of the inferior good because they believe they cannot afford a superior substitute, making the substitution effect negative. Therefore, for a good to be a Giffen good, its income effect must be larger than its substitution effect. It implies that the proportion of the good's cost in the consumer's budget must be significant.

Economists Robert Jensen and Nolan Miller Reasoned That to Be