2. Identifying normal, inferior, and Giffen goods Suppose that 11 on the followi

Question

2. Identifying normal, inferior, and Giffen goods Suppose that 11 on the following graph represents your initial budget constraint for good X and good Y, and point A represents the optimal choice, given this choice set. After a change in the price of good x, your new budget constraint is now 12. The budget that would allow for the initial level of consumption based on the new prices is parallel to 12, representing the same tradeoff between good X and good Y, and it is tangent to the given indifference curve (U) at point B. GOOD Y Budget GOOD X If point C represents the new optimal choice, what kind of good is good X7 O Normal good Giffen good Inferior good, but not a Giffen good

Explanation / Answer

The correct option is giffen good. The graph shows that The price of good X has increased which reduces the purchasing power. The movement from B to C shows income effect. When price increases the consumption of good X increases which represents the good is giffen.

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