Question

When does Giffen’s paradox arise?

• A. When demand for a good increases as its price increases
• B. When the demand for a good decreases as its price increases
• C. Both (A) and (B)
• D. None of these

Hint:

Giffen's paradox occurs for inferior goods where an increase in price leads to an increase in demand, often due to a lack of substitutes or the necessity of the good.

Answer 1

The Correct Option is A

Step 1: Understanding Giffen’s Paradox:
Giffen's paradox refers to a situation in which the demand for a good increases as its price increases, which contradicts the basic law of demand. According to the law of demand, when the price of a good rises, the quantity demanded typically falls. However, in the case of Giffen goods, the opposite occurs. This phenomenon is observed in certain low-income populations where the good in question is a staple or inferior good.
Step 2: Analyzing the Options:
- Option (A) When demand for a good increases as its price increases: This is the correct answer. Giffen goods are characterized by the fact that as their price increases, demand for them increases as well, due to the lack of substitute goods and the necessity of the good in question.
- Option (B) When the demand for a good decreases as its price increases: This is incorrect. This is the usual behavior of most goods and follows the law of demand, not Giffen's paradox.
- Option (C) Both (A) and (B): This is incorrect. Both options cannot be true at the same time because they describe contradictory behaviors.
- Option (D) None of these: This is incorrect because (A) is the correct answer.
Step 3: Conclusion and Answer:
The correct answer is (A) because Giffen’s paradox refers to the unusual situation where demand for a good increases as its price increases, primarily for inferior goods in low-income populations.