Consider the indifference curve map and budget constraint for two goods (B and K).Suppose the good on the horizontal axis (K)is inferior and Giffen.When the price of the inferior good on the horizontal axis (K)increases
A)the substitution effect causes an increase in the consumption of K and the income effect causes a decrease in the consumption of K.However, the substitution effect is less than the income effect.
B)the substitution effect causes a decrease in the consumption of K and the income effect causes an increase in the consumption of K.However, the substitution effect is greater than the income effect.
C)the substitution effect causes an increase in the consumption of K and the income effect causes a decrease in the consumption of K.However, the substitution effect is greater than the income effect.
D)the substitution effect causes a decrease in the consumption of K and the income effect causes an increase in the consumption of K.However, the substitution effect is less than the income effect.

Question

Quizplus · Accepted Answer

When a good is inferior and Giffen, the income effect dominates the substitution effect, and the consumption of the good decreases as its price increases. However, since the good is also Giffen, the substitution effect is still negative but smaller in magnitude than the income effect. Therefore, the consumer buys less of the good when its price increases, but the decrease is not as much as it would have been if the good were not Giffen. This is represented by a backward-sloping demand curve, which is the defining characteristic of a Giffen good.

Consider the Indifference Curve Map and Budget Constraint for Two