Practice question · Multiple choice
For a Giffen good, demand rises when the price rises. Why does that not refute the law of demand?
Hints
- Split the price change into substitution and income effects and sign each one.
- Which effect can point the "wrong" way, and for which kind of good?
Show the answer
C. Because the law describes the substitution effect alone
Why
Slutsky is what makes the anomaly legible. A price rise on a staple consuming much of a poor household’s budget makes it poorer, and the income effect on an inferior good can dominate.
Practise Income and Substitution Effects
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