Consider the indifference curve map and budget constraint for two goods,beef and potatoes.Suppose the good on the horizontal axis,potatoes,is a Giffen good.Beef is measured on the vertical axis and is a normal good.When the price of potatoes increases,
A) the substitution effect causes an increase in the consumption of potatoes,and the income effect causes a decrease in the consumption of potatoes.The substitution effect is less than the income effect.
B) the substitution effect causes a decrease in the consumption of potatoes,and the income effect causes an increase in the consumption of potatoes.The substitution effect is greater than the income effect.
C) the substitution effect causes an increase in the consumption of potatoes,and the income effect causes a decrease in the consumption of potatoes.The substitution effect is greater than the income effect.
D) the substitution effect causes a decrease in the consumption of potatoes,and the income effect causes an increase in the consumption of potatoes.The substitution effect is less than the income effect.

Question

Quizplus · Accepted Answer

Since potatoes are a Giffen good, its demand will increase with a rise in its price due to the income effect. This leads to a decrease in the consumption of beef, which is a normal good. The substitution effect, on the other hand, will lead to a decrease in the consumption of potatoes as its price increases. However, since potatoes are a Giffen good, the income effect dominates the substitution effect, making the net effect a decrease in the consumption of potatoes. Therefore, the substitution effect is less than the income effect, and the correct choice is D.

Consider the Indifference Curve Map and Budget Constraint for Two