Question

What are those goods with negative income effect and positive price effect called?

• A. Normal goods
• B. Inferior goods
• C. Giffen goods
• D. Complementary goods

Hint:

Giffen goods are a rare class of inferior goods where an increase in price leads to an increase in demand due to the dominance of the negative income effect.

Answer 1

The Correct Option is C

Step 1: Understanding Giffen Goods:
Giffen goods are a unique class of inferior goods for which an increase in price leads to an increase in demand, due to the negative income effect outweighing the positive substitution effect. These goods have both negative income effects (as income decreases, demand for the good increases) and positive price effects (as price increases, demand for the good increases).
Step 2: Analyzing the Options:
- Option (A) Normal goods: Normal goods have a positive income effect (demand increases as income increases), but they do not exhibit the behavior described in the question.
- Option (B) Inferior goods: Inferior goods have a negative income effect (demand increases as income decreases), but they do not exhibit the price effect described.
- Option (C) Giffen goods: This is the correct answer. Giffen goods are a subset of inferior goods that display both a negative income effect and a positive price effect, leading to an increase in demand as their prices rise.
- Option (D) Complementary goods: Complementary goods are goods that are consumed together (e.g., printers and ink), but they do not exhibit the behavior described in the question.
Step 3: Conclusion and Answer:
The correct answer is (C) because Giffen goods are the only goods that exhibit both a negative income effect and a positive price effect.