If a good is Giffen and its price increases,
A)the income effect will be positive and the substitution effect will be positive.
B)the income effect will be negative and the substitution effect will be negative.
C)the income effect will be positive and the substitution effect will be negative.
D)the income effect will be negative and the substitution effect will be positive.

Question

Quizplus · Accepted Answer

When a good is Giffen, it has no close substitutes and is essential for the consumer. Therefore, when its price increases, the consumer will have to spend more on this essential good, reducing their ability to purchase other goods or reducing their purchasing power, leading to a negative income effect. Additionally, the lack of substitutes means that the consumer cannot switch to a cheaper alternative, resulting in a positive substitution effect. Therefore, the correct answer is C, as it combines a positive income effect and a negative substitution effect.

If a Good Is Giffen and Its Price Increases