Skip to content

CMA Foundation · Fundamentals of Business Economics and Management · The Fundamentals of Economics

A luxury watch is bought mainly as a status symbol, and some buyers purchase more of it when its price rises because the higher price increases its prestige. Which statement correctly describes this situation?

The watch is a Veblen good. Its demand rises with price because buyers value the prestige of a high price, so it is a recognised exception to the law of demand. A Giffen good, by contrast, is an inferior staple good, not a status item.

  1. AIt is a Veblen good, an exception to the law of demand with an upward-sloping demand curveCorrect
  2. BIt is an inferior good, so demand rises as income rises
  3. CIt is a Giffen good because it is a staple food item
  4. DIt follows the law of demand because quantity bought falls as price rises

Explanation

Goods whose demand rises with price because of prestige or conspicuous consumption are called Veblen goods, an exception to the law of demand. Giffen goods are inferior staples whose demand rises when price rises due to a strong income effect, not status. The watch is not a staple, so the Giffen option fails.

Did you get it right without looking?

One question tells you little. A timed set on The Fundamentals of Economics shows your real accuracy, how long you take and where you lose marks.

Practise The Fundamentals of EconomicsFree diagnostic mock

More The Fundamentals of Economics questions