Question

Q. In the context of different types of goods in an economy, consider the following statements:

Which of the above statements is/are correct?

• A.
  1 only
• B.
  2 only
• C.
  Both 1 and 2
• D.
  Neither 1 nor 2

Answer 1

The correct option is B

2 only
Explanation:

Traditional law of demand states that the demand for a product varies inversely with its price keeping the prices of other goods and taste of the consumer is constant.

Statement 1 is incorrect: A good is known to be a normal good if it follows the Law of Demand. Examples: clothes, household appliances etc.
On the other hand, the demand increases as the price increases for a Veblen good because of its exclusive nature and appeal as a status symbol. Examples include designer jewelry, luxury cars, pricey watches etc.

Statement 2 is correct: Giffen goods are low income, non-luxury products for which demand increases as the price increases and vice versa. This is due to lack of close substitutes and income pressures. Hence violates the law of demand. Examples include bread, rice, and wheat. This is because these goods are commonly essentials and contain no near-dimensional substitutes at the same price levels.