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In: Economics

6. Assume x1=(?+2?1)/?1 − ?2 is the demand function for good 1. It is a Giffen...

6. Assume x1=(?+2?1)/?1 − ?2 is the demand function for good 1. It is a Giffen good.

TRUE or FALSE (Explain)

Expert Solution

Answer to the following question:

Option: False.

Explanation: Giffen good has the characteristic that the law of demand is not applicable in case of these goods. It has the feature that when price increases the demand for this good increases. So, there exist a direct and positive relationship between the quantity demanded and the price for giffen good.

Let us take an numerical example. Suppose the consumer's income (m) is 100, P1 initially is 2 and P2 is also 2, then the demand X1 will be:

So, at price of X1=2, the demand for X1 is 50.

Now keeping m and p2 constant, suppose the price of the X1 increases to P1=4. Thus, the demand for X1 will be:

Thus, we can see that with the increase in the price of the commodity, the demand for the commodity declines. So, X1 is not a giffen good.

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Rahul Sunny answered 2 years ago

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