If ramen is a Giffen good and the price of ramen decreases:
A) the substitution effect will cause a decrease in the consumption of ramen.
B) the income effect will cause a decrease in the consumption of ramen.
C) the income effect will reinforce the substitution effect, and the consumption of ramen will decrease.
D) the demand curve for ramen will still be downward-sloping.

Question

Quizplus · Accepted Answer

For a Giffen good, the income effect is negative and stronger than the substitution effect. When the price of ramen decreases, the income effect causes a decrease in consumption because ramen is an inferior good and consumers feel effectively richer, leading them to buy less ramen and more of other goods.

If Ramen Is a Giffen Good and the Price of Ramen