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 Requirement#1:

Which type of product is wheat for people from group A and people from group B?

Solution:

  1. Wheat is a Giffen good for people from group A because a Giffen good is a low income, non-luxury product for which demand increases as the price increases and vice versa. A Giffen good has an upward-sloping demand curve which is contrary to the fundamental laws of demand which are based on a downward sloping demand curve. Demand for Giffen goods is heavily influenced by a lack of close substitutes and income pressures.

          

                                                            Figure 1(wheat is a giffen good for group A)

   

Above figure shows that as the price for wheat increases demand for wheat decreases and whenever the price for wheat decreases, its demand decreases also because it is human mentality that higher cost products are better. Decrease in price will definitely decrease the demand for wheat. Demand decreases, price decreases, quantity decreases.

  1. Wheat is a Substitute/normal good for people from group B because a decrease in the price for wheat will decrease the demand for its substitute; hence demand for wheat will increase. An inverse relationship is represented by a downward sloping line from left to right.

 

                                             

 

Above diagram shows downward sloping demand curve due to the presence of substitutes of wheat. Hence, when price for wheat decreases its demand increases and vice versa.

Requirement#2:

What will be the income effect for people from group A?

Solution:

  • In the case of a Giffen good; the positive income effect is stronger than the negative substitution effect so that the consumer buys less of wheat when its price falls.
  • In other words, Giffen goods or inferior goods are those goods for which demand declines as consumer real income (nominal income/price) rise. Hence; demand falls when the price decreases. So income increases and group A do not take any good who have not beneficial for them because they are very caring for health.

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