The Demand Curves for Giffen Goods are Downward Sloping
Consumers' optimal consumption strategy in anticipation of price variations is to equalize the marginal utility of income across different price regimes. Since the marginal utility of income is positively related to the price of a Giffen good, consumers will adopt a consumption plan (through saving and borrowing, insurance, or an appropriate choice of portfolio) that allows them to increase total expenditure when the Giffen good is relatively expensive and to reduce total expenditure when the Giffen good is relatively cheap. Giffen goods being inferior goods, this optimal choice of total expenditures will produce an income effect that reinforces the substitution effect, thus resulting in a downward sloping demand curve. Copyright 1992 by Royal Economic Society.
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