ENADE Ciências Econômicas Practice Questions - ENADE Ciências Econômicas - Exame Nacional De Desempenho Dos Estudantes Exam

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When the price of a good increases, the total change in quantity demanded can be decomposed into substitution and income effects via the Slutsky equation. Under what specific condition does a good become a Giffen good?

The good is an inferior good, but the substitution effect dominates the income effect. The cross-price elasticity of demand is strictly positive, making the good a gross substitute for all other consumption goods. The good is an inferior good, and the negative income effect outweighs the negative substitution effect in absolute magnitude. The good is a normal good, and the positive income effect reinforces the negative substitution effect.

Correct Answer:

The good is an inferior good, and the negative income effect outweighs the negative substitution effect in absolute magnitude.

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