Final answer:
The statement is false. An inferior good becomes a Giffen good when the income effect is so strong that it outweighs the substitution effect, causing an increase in demand even as prices rise.
Step-by-step explanation:
The statement that an inferior good is only Giffen when the substitution effect exceeds the income effect is False. A Giffen good, which is a special category of inferior goods, exhibits an upward-sloping demand curve due to the strong income effect overpowering the substitution effect. Here, even as the price increases, the quantity demanded increases because the income effect causes consumers to give up more expensive substitutes and consume more of the inferior good despite its higher price.
An inferior good is a good where the quantity demanded falls as income rises, and the quantity demanded rises as income falls. This is typically because when individuals have higher incomes, they opt for better substitutes. However, a Giffen good defies standard economic theory because as prices increase, individuals with lower income might not be able to afford the substitutes and are thus forced to buy more of the inferior good, despite its higher price, often due to the limitation in their choices caused by their financial situation.