Law of demand is violated when?

Option 1 -> Income effect being negative is normal for regular goods and doesn't violate the law of demand.

Option 2 -> Substitution effect is always negative when price increases, as consumers substitute away from expensive goods - this is normal behavior.

Option 3 -> When negative income effect (characteristic of inferior goods) exceeds the substitution effect, the overall demand curve slopes upward, creating a Giffen good scenario.

Option 4 -> When negative income effect is less than substitution effect, the substitution effect dominates and law of demand still holds (normal inferior good).

Hence, Option 3: Negative income effect is greater than substitution effect -> The law of demand is violated in the case of Giffen goods. These are special inferior goods where when price increases, the negative income effect (which increases quantity demanded for inferior goods) is so strong that it outweighs the substitution effect. This results in quantity demanded actually increasing as price increases, which directly violates the law of demand. Classic examples include staple foods consumed by extremely poor populations where the good represents a large portion of their budget. -> correct