Discussion
In case of Giffen goods, the negative income effect is ............... the substitution effect.
Answer: B
For a Giffen good, the negative income effect is greater than the substitution effect.
A Giffen good is a strongly inferior good taking a large share of the budget. When its price falls, the substitution effect raises demand, but the rise in real income cuts demand for the inferior good. If this negative income effect outweighs the substitution effect, quantity demanded falls with price, and the demand curve slopes upward.
If the income effect were equal to or smaller than the substitution effect, demand would not fall when the price falls, so the good would not be Giffen.
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