The income effect of a price increase for a Giffen good outweighs the substitution effect.

Question

Quizplus · Accepted Answer

In the case of a Giffen good, the income effect dominates the substitution effect when the price of the good increases. This is because the good is so essential to the consumer (usually due to low income and lack of substitutes) that they will continue to purchase it, even if the price increases. As a result, the increase in price leads to a decrease in the consumer's purchasing power, causing them to decrease their consumption of other goods, resulting in a larger income effect than substitution effect.

The Income Effect of a Price Increase for a Giffen