In the theory of consumer behavior, we encountered a class of commodities that violates the law of demand: these are called Giffen goods, where the quantity demanded increases as the price increases. The law of demand predicts the opposite: there is an inverse relationship between price and quantity demanded, ceteris paribus. Although consumer theory allows for the possibility of Giffen goods, there is scant empirical support for their existence.
Using a standard decomposition technique, illustrate why Giffen goods must necessarily be inferior goods. Discuss your graph in detail.
There have been previous attempts at providing empirical support for the existence of Giffen goods. Briefly discuss one or two of them. When asked for examples of Giffen goods, many people suggest luxury items, but these are not technically Giffen goods. They are, in fact, Veblen goods. Critically differentiate between the two types of goods.