This is on the CFAI material… I picked (B) : Depand curve is slopes upward but it says its wrong… The explaination even says Giffen good demand curve slopes upward… not sure why choice B is wrong. I understand choice C is right.
Q. Which of the following is most likely to be a characteristic of a Giffen good? Its:
- A substitution effect is negative.
- B demand curve slopes upward.
- C income effect is negative.
Solution
C is correct. A Giffen good is an inferior good. All inferior goods have a negative income effect (less is purchased as income rises). While the substitution effect is always positive for all goods, for a Giffen good the income effect is so strong and so negative that it overpowers the substitution effect; the result is that as its price declines, less of it is purchased. This results in a positively sloped individual demand curve.
A is incorrect because a substitution effect is always positive for all goods.
B is incorrect because for a Giffen good, the consumer actually buys less of the good when its price falls, resulting in a positively sloped demand curve (upward sloping).