Introduction to Economics 1

Yanıt Açıklaması: A diminishing marginal rate of substitution is exhibited when indifference curves are convex, and the slope of the indifference curve increases (becomes less negative) as we move down along the curve. The answer is B.

Yanıt Açıklaması: Ceteris Paribus is a Latin phrase, which means “other things being equal.” It is used in economics to state that all variables other than the one studied are assumed to be constant or fixed. A demand curve is a graph that illustrates how much of a specific good an individual or household would be willing to buy at different prices. Market demand is the sum of all the quantities of a product demanded per period by all the buyers in the market. A supply curve is a graph which illustrates how much of a good a firm is willing to sell at different prices. In this question it is mentioned about supply curve, and the supply curve of an individual firm. The correct answer is Choice E.

Yanıt Açıklaması: Using the mid-point approach, the formula to calculate the price elasticity of demand is:(Q2 -Q1 ) / (Q2 +Q1 )/ 2 divided by (P2 - P1 ) / (P2 + P1 )/2. Using this formula, the result is -2,1.

Yanıt Açıklaması: Limited income necessitates choice. The main assumption of scarcity in economic theory states that we all have limited incomes. Limited income forces us to make choices about which goods we will and will not purchase. This will keep us within our budget. When more of one good or service is purchased, we must purchase less of some other good.

Yanıt Açıklaması: Market Failures and Externalities While the market mechanism generally leads to an efficient allocation of resources, markets sometimes fail to achieve that. Economists call it a market failure when the market itself falls short of allocating resources efficiently.

Yanıt Açıklaması: Demand is inelastic when the percentage change in quantity demanded is smaller than the percentage change in price. Inelastic demand always takes a value between zero and -1. Demand is elastic when the percentage change (decrease) in quantity demanded is larger than the percentage change (increase) in price. Elastic demand has an absolute value greater than 1.

Yanıt Açıklaması: Determinants of Demand The nature, the slope and the position of the demand curve are determined by different factors. The slope and the curvature of the demand curve are the consequences of consumer responses to the changes in prices under ceteris paribus conditions. There are two channels in which these responses are shaped: Income effect and substitution effect.

Yanıt Açıklaması: For normal goods,the income elasticity is greater than zero and price elasticity is negative For inferior goods,the income elasticity is less than zero. Answer is C.

Yanıt Açıklaması: A Phillips curve shows the tradeoff between unemployment and inflation in an economy.  While this relationship examined first by the British economist William Phillips raised much controversy in economics in the past, most economists today recognize the possibility of the presence of a tradeoff between inflation and unemployment at least in the short-run. The correct answer is E.

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. If income increases, the demand curve for the inferior good will shift down to the left. When income reaches a certain level, the consumer buys only the higher quality goods and the demand for the inferior good will become zero. Inferior goods are the goods for which the demand falls when the income goes up. As it is understood the correct answer is “A”. Normal goods are the goods for which the demand increases when income is higher and decreases when income is lower. Two goods are said to be complements if they are generally or necessarily consumed together, such as tea and sugar cubes or printers and ink cartridges. Of choice means preferred. Ordinary means normal or average, and not unusual or special.

Yanıt Açıklaması: Normal goods are the goods for which the demand increases when income is higher and decreases when income is lower.

Yanıt Açıklaması: In our sample graph, the demand curve shifts to the right (from D0 to D1), so it illustrates the change in market equilibrium when the demand shifts. The graph shows that the market is initially in equilibrium at point E. When the demand increases, the demand curve shifts to the right and a new equilibrium is established in the intersection of the new demand curve and supply curve at point F. This point is characterized by a new price and a new quantity representing both demand and supply. This new price is of course higher than the initial price. The correct answer is A.

Yanıt Açıklaması: Producer surplus is the difference between the price at which a firm sells its product and the cost of production.

Yanıt Açıklaması: Efficiency is the property of a resource allocation of maximizing the total surplus received by the society

Yanıt Açıklaması: The individual demand is derived from the solution of a personal utility maximization problem. Utility that the individual obtains from each additional or marginal unit consumed of a good declines, as more and more of that good is consumed. The consumer is said to be satiated after consuming a large enough quantity.  Market demand is the sum of all the quantities of a product demanded per period by all the buyers in the market. A product is said to be inferior if the demand for that product goes down when the income of the consumers increases. If two products are substitutes for each other, a change in the price of one product will change the demand for the other product in the opposite direction. As it is understood from the information the correct answer is “C”.

Yanıt Açıklaması: If a consumer buys less of a good when his or her income rises, the good is called an inferior good. In other words, inferior goods will have better quality alternatives. Therefore, when income rises, people can afford to forego the cheap alternative and buy the higher quality good instead. The correct answer is C.

Yanıt Açıklaması: A perfectly elastic demand curve which would have a horizontal shape indicates “extreme price sensitivity” which means that the tiniest price increase causes the demand to fall to zero for the analyzed good. In economic theory, a good example of a perfectly elastic demand curve is the demand curve that firms face in competitive markets. The reason why competitive firms face a perfectly elastic demand curve is that elasticity is greater when there are lots of close substitutes available. In this case, the competitive firm is selling a product that has many perfect substitutes since in the competitive markets, by definition, there are many sellers and all sellers sell identical products

Yanıt Açıklaması: Positive statements in economics are statements that intend to describe how things are and how things actually work. A normative statement is a prescriptive statement, like the ones expected to be made by a policy adviser, involving normative judgements and prescriptions about how the world should be. As it can be understood from these definitions the correct answer is “C”.

Yanıt Açıklaması: BUDGET CONSTRAINT Consumption choices are limited by income and prices. We summarize these influences on buying plans in a budget line or constraint. Given his or her tastes or preferences, along with the assumption of rationality of consumers, he or she tries to get on the highest possible indifference curve. To do so, the consumer must consider factors other than his or her own tastes or preferences or choices. These factors, such as prices of commodities and the level of the consumer’s income, can limit or constrain the nature and size of the market basket that he or she can buy. Let’s consider the budget constraint facing an individual who has a fixed level of income (I) that can be used to buy two goods (X and Y) at fixed prices (PX and Py). The budget constraint facing this individual can be expressed as: Px.X + Py.Y = I

Yanıt Açıklaması: Microeconomics is the a main branch of economics that studies the behavior and decisions of the smallest decision units such as individuals or households and firms, whereas Macroeconomists study how a country’s economy as a whole is structured and works, by paying particular attention to the effects of monetary and fiscal policies pursued by the government. The answer is D.