Veblen good and Giffen good?

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raffythebuggy

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Which of the following statements with respect to Giffen and Veblen goods is least accurate?
Ans given:
A. Both types of goods violate the fundamental axioms of demand theory.
Explanation given: Veblen goods violate the fundamental axioms of demand theory, but Giffen goods do not.
Why is this so? For both types of goods, the quatity demanded of the good decreases as price decreases. And both have an upward sloping demand curve.
Or can someone explain to me what is “fundamental axioms of demand theory”?
 
raffythebuggy wrote:Which of the following statements with respect to Giffen and Veblen goods is least accurate?
Ans given:
A. Both types of goods violate the fundamental axioms of demand theory.
Explanation given: Veblen goods violate the fundamental axioms of demand theory, but Giffen goods do not.
Click to expand...
I’m missing something here: Are you saying that this is the (claimed) correct answer, or that this was your answer (and that it’s incorrect)? The answer and the explanation are at odds.
raffythebuggy wrote:Why is this so? For both types of goods, the quatity demanded of the good decreases as price decreases. And both have an upward sloping demand curve.
Click to expand...
Giffen goods have a normal substitution effect (lower price, higher demand; higher price, lower demand). Veblen goods have an abnormal substitution effect (higher price, higher demand; lower price, lower demand). The axiom to which they refer is that goods are supposed to have a normal substitution effect.
 
Just did the mock exam and i was also confuse about this.
Why is the giffen goods have a normal substition effect? If that’s the case then how does answer C is accurate? because from what i get is type A and C support each other.
————— This is the Question
41. Which of the following statements with respect to Giffen and Veblen goods is least accurate?
A. Both types of goods violate the fundamental axioms of demand theory.
B. Giffen goods are “inferior” whereas Veblen goods are “high-status” goods.
C. Both types of goods demonstrate the possibility of a positively sloping demand curve.
Answer = A

————– And this is Giffen Goods from Investopedia:

Definition of ‘Giffen Good’

A good for which demand increases as the price increases, and falls when the price decreases. A Giffen good has an upward-sloping demand curve, which is contrary to the fundamental law of demand which states that quantity demanded for a product falls as the price increases, resulting in a downward slope for the demand curve. A Giffen good is typically an inferior product that does not have easily available substitutes, as a result of which the income effect dominates the substitution effect. Giffen goods are quite rare, to the extent that there is some debate about their actual existence. The term is named after the economist Robert Giffen.
 
A is correct because, when price increases, quantity of giffen goods demanded reduces(fundamental axiom of demand), when price of veblen goods increase, quantity demanded increases(violates fundamental axiom of demand).
C is incorrect because only Veblen goods have positive demand curve, Giffen goods have their demand curve sloping downwards.
 
But the solution said the “least likely” was A, so the incorrect one is A instead of C.
 
Lol. However you put it. The reason why c is correct is that, giffen goods, according to some article I read online, are positively sloped because, giffen goods are goods with inferior quality for which close substitutes can’t be found, so when the price of these goods increase, they’ll have to cut short their demands for other goods, then demand more of these inferior goods. Therefore, higher price, higher quantity demanded, positive slope.
 
Both Giffen and Veblen goods are positively sloped but only Veblen goods violate the accepted demand theory.
To help you understand let’s first consider the following- producers know that if they increase the price of a product consumers will decrease quantity demanded. In case of Veblen goods however, higher the price, greater the perception of it as “prestige” => quantity demanded increases. This phenomena cannot be explained (or graphed as far as I remember) with the tools of the microeconomic theory but such goods do exist (example Aston Martin cars).
Giffen goods can be explained by microeconomic theory- income effect is negative and greater in magnitude than substitution effect. You can draft it if you want. In reality Giffen goods are quite rare (imagine very poor population consuming only potatoes and from time to time meat. If potatoes price increase they will not be able any more to purchase any meat => they will consume only potatoes => Q potato will increase).
Hope that helps.
 
So the logical explanation is because in option C, it mentions that the demand curve is “possibly” upward sloping, but in reality giffen goods doesn’t violate the fundamental axiom of demand theory.
Thanks for the replies guys
 
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