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      Question

      A Giffen good is consumed by poor households. If the

      price of such a good rises, what happens to demand and how does it relate to poverty?
      A Demand falls; poverty decreases Correct Answer Incorrect Answer
      B Demand rises; poverty makes the income effect stronger Correct Answer Incorrect Answer
      C Demand remains same; poverty has no role Correct Answer Incorrect Answer
      D Demand falls; poverty increases substitution effect Correct Answer Incorrect Answer
      E Demand rises; poverty reduces income effect Correct Answer Incorrect Answer

      Solution

      A Giffen good sees demand rise with price. Poverty intensifies the income effect (people feel poorer and buy more staple), which outweighs the substitution effect.

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