Skip to content

CMA Foundation · Fundamentals of Business Economics and Management · Theory of Demand and Supply

A poor family in a village spends most of its income on coarse millet, an inferior staple, and has no cheap alternative. When the price of millet rises, the family cuts back on meat and buys more millet to fill the gap. Which statement best describes this?

The negative income effect outweighs the substitution effect, so demand rises with price. For this inferior staple, a price rise cuts real income and pushes the family to buy more millet, which is the Giffen paradox and an exception to the law of demand.

  1. ASubstitution effect outweighs the income effect, so the law of demand holds
  2. BNegative income effect outweighs the substitution effect, so demand rises with priceCorrect
  3. CDemand is perfectly inelastic, so quantity does not change
  4. DThe good is a luxury good with positive income effect

Explanation

This is the Giffen paradox. The price rise reduces real income, and for an inferior good the negative income effect makes the family buy more of it; this outweighs the substitution effect, so quantity demanded rises with price. Option A is wrong because it describes a normal good; the quantity here does change.

Did you get it right without looking?

One question tells you little. A timed set on Theory of Demand and Supply shows your real accuracy, how long you take and where you lose marks.

Practise Theory of Demand and SupplyFree diagnostic mock

More Theory of Demand and Supply questions