Question

The Law of demand is violated when:

• A. income effect is negative
• B. substitution effect is negative
• C. negative income effect is greater than substitution effect
• D. negative income effect is less than substitution effect

Answer 1

The correct option is D

The income effect is greater than the substitution effect in Giffen goods. Giffen goods are the exceptions to the law of demand. Giffen goods are those highly inferior goods when even if their prices decrease, there will be a decrease in the demand for those goods.

Giffen goods show a high negative income effect which means if there is an increase in the income of the buyer there will be a decrease in the demand for these goods. Hence the correct answer is option D.