Introduction to Economics 1

Yanıt Açıklaması: For Substitute goods, the cross-price elasticity of demand is positive since the price increase of good X causes the quantity demanded of good Y to increase. For substitutes, Cross-price elasticity of demand is greater than zero. For complement goods, the cross-price elasticity of demand is negative because a price increase in good X causes the quantity demanded of good Y to decrease. For complements,Cross-price elasticity of demand is less than zero. Answer is E.

Yanıt Açıklaması: A perfectly competitive firm should normally stops increasing the production when the marginal cost becomes as high as the market price. Otherwise, they cannot make a profit at all. Moreover, as everybody knows, improvements in the production technology lead to an increase in the supply of goods by causing the cost of production per unit to decrease. The statements III and IV are true in terms of the concept of supply. The correct answer is E.

Yanıt Açıklaması: Tax incidence is the study of who bears the burden of taxation. The correct answer is A.

Yanıt Açıklaması: Price Elasticity-Total Revenue Relationship with a Linear Demand Curve When the demand is elastic (If we are on the elastic portion of demand curve), then Price elasticity of demand is greater than 1, ? P d ( >1), in case of a price increase or price hike, Percentage change in Quantity>Percentage change in Price. The decrease in total revenue from lower Quantity is greater than the increase in total revenue from higher Price , so total revenue from sales falls.

Yanıt Açıklaması: A competitive market is a type of market in which there are many buyers and sellers so that the effect of each one on market price is negligible. The answer is B.

Yanıt Açıklaması: Most of the markets are imperfectly competitive. The extreme cases of imperfect competition are monopoly and monopsony. Monopoly is a market where there is only one seller. The Türk Telekom, for example, is a monopoly in internet infrastructure. All the other internet providers have to use Telekom’s infrastructure. Likewise, TCDD is a state owned monopoly in railway transportation. There are also local monopolies. Many cities in Turkey are served by a single airline (typically THY subsidiary Anadolu Jet). In smaller towns, many goods and services could be offered by a single seller. There are a few worldwide monopolies as well: SpaceX, for example, is the only company selling touristic trips to the space. The pricing behavior of a monopoly is totally different than the behavior of firms operating in a competitive market. Monopsonist markets are the ones in which there exist only one buyer and many sellers. The relatively high agricultural prices in Turkey might be attributed to near monopsonist local markets where there are only a few merchants buying the farmers’ products. For example, larger milk and dairy product firms generally act as monopsonist buying wholesale milk from cow owners in many towns around Turkey. As it is understood from the information given the correct answer is “B”.

Yanıt Açıklaması: Consumer surplus (CS) is the amount a buyer is willing to pay minus the buyer actually pays, which is the market price. That is: CS=WTP–P. The consumer surplus that each buyer gets is different.

Yanıt Açıklaması: A product is said to be inferior if the demand for that product goes down when the income of the consumers increases. Consumers prefer to buy higher priced substitutes in place of the inferior goods when their income rises. Examples of inferior goods may be ordinary (white) bread, cheap cheese (“lor”) or fake brand (imitation) jeans. The correct answer is C.

Yanıt Açıklaması: Perfect Competition The conventional ideal market model represents perfect competition. This is a hypothetical market in which: The good or service being exchanged is the same across all sellers; the quality or the characteristics of it do not change from one seller to another There is a high number of potential buyers and sellers of this good; and all act independently from each other Entry of new sellers into the market is not restricted by any means Buyers and sellers readily and freely have access to information with regards to the prices at which other buyers and sellers are exchanging the good.

Yanıt Açıklaması:

Yanıt Açıklaması: Governments generally levy taxes on many goods and services to raise revenue to pay for expenditures such as national defense, public schools, etc. Taxes may be imposed on the market transactions, institutions, property, meals, and other things. The government can choose and make buyers or sellers to pay the tax. Moreover, regardless of whether the tax is levied on buyers or sellers, the effects of taxation are the same: the price that the buyers pay rises and the price that the sellers receive falls. Finally, the tax also reduces the market size by reducing the equilibrium quantity. The correct answer is D.

Yanıt Açıklaması: The price of coffee P T is 5 TL per cup. Individual A’s quantity demanded is 3 cups, individual B’s quantity demanded is 2 cups, and individual C’s quantity demanded is 4 cups. Summing up all the quantities demanded at the price of 4 TL, we arrive at the quantity demanded (9 cups) for PT = 5 TL in the market. Replicating the procedure for all prices, we derive the market demand curve for the market. The market demand is the sum of individual demands. The correct answer is Choice E.

Yanıt Açıklaması: Price elasticity of demand is percentage change in quantity demanded divided by percentage change in price. An increase is a positive change and a decrease is a negative change. Hence the statement "A decrease in price by 25 percent will cause an increase in demand by 100 percent" means -100/25 = -4.

Yanıt Açıklaması: Budget constraint is not related to consumer’s tastes or preferences, it is related to the income or in other words the budget of the consumer.

Yanıt Açıklaması: The law of diminishing marginal utility is that the marginal (or additional) utility derived from consuming successive units of a product will eventually decline as the rate of consumption increases.

Yanıt Açıklaması: The price elasticity of supply measures how much quantity supplied responds (Qs) to a change in price (P). In other words, the price elasticity of supply measures the price-sensitivity of sellers’ supply. Moreover if you want to calculate the price elasticity of supply, you need to divide the percentage change in quantity supplied divided by the percentage change in price. Moreover, because of the law of supply, the price elasticity of supply has always a positive sign. An increase in price causes the quantity supplied to increase. The supply of a good is said to be elastic if the quantity supplied changes more than the price changes. That is, we can say that if the price elasticity of supply takes the value between 0 and 1, the good has inelastic supply. If the value is larger than 1, we say the good has elastic supply. Lastly, we can say that, the more easily sellers can change the quantity they produce due to availability of inputs, the greater the price elasticity of supply. The correct answer is A.

Yanıt Açıklaması: Price Elasticity of Demand- Mid-point Approach When we take two points such as points A and B, on the demand curve, then calculating the price elasticity of demand moving from point A to B or B to A and have the same elasticity measure requires the following equation. Different than the standard way to compute price elasticity of demand, the mid-point method calculates the percentage change by dividing the change by the average of the initial and final levels of price and quantities.

Yanıt Açıklaması: A tax levied on buyers means that the buyers will have to pay more, which causes their demand to fall. The fall in demand also hurts sellers, by forcing them to reduce their sale price. Similarly, a tax levied on sellers is like a cost of production increase, and sellers have to pass along a portion of that cost increase to buyers in the form of higher prices. So the effects of taxation on Prices, on quantity and on tax incidence are the same whether the tax is imposed on buyers or sellers. Finally, the tax also reduces the market size by reducing the equilibrium quantity.

Yanıt Açıklaması: The price elasticity of demand measures the responsiveness of demand to changes in price. The correct answer is D.

Yanıt Açıklaması: Cutting money supply to reduce inflation is often thought to raise unemployment. This tradeoff between inflation and unemployment is sometimes illustrated by a curve called the Phillips curve.