1) For each of the following goods, state whether it is a normal good, a luxury, a necessity, or an inferior good. (Sugar)<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
a) Inferior. Increases in income lead to less use of sugar. However, rich people do not use much less sugar than poor people, so elasticity is positive but greater than 1.
b) Inferior. Increases in income lead to slightly more use of sugar. However, rich people do not use much more sugar than poor people, so elasticity is positive but less than 1.
c) Normal and necessity. Increases in income lead to slightly more use of sugar. However, rich people do not use much more sugar than poor people, so elasticity is positive and greater than 1.
d) Normal and necessity. Increases in income lead to slightly more use of sugar. However, rich people do not use much more sugar than poor people, so elasticity is positive but less than 1.
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2) A perfectly competitive firm sells its good for $24. If marginal cost is three times the quantity produced, how much does the firm produce? Why?
a) Assuming perfect competition, the firm is producing where MR = MC. If the price is $24, and MC is three times the quantity, it is producing 72 units.
b) Assuming perfect competition, the firm is producing where MC is twice MR. If the price is $24, then MC = $48. This means that the firm is producing 12 units.
c) Assuming perfect competition, we do not have enough information to determine how much the firm is producing.
d) Assuming perfect competition, the firm is producing where MR = MC=P. Since price is $24, MR also is $24. If MC is three times the quantity, it is producing 8 units
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3) State the law of supply.
a) Quantity supplied rises as price increases, other things constant. Quantity supplied falls as price decreases, other things constant.
b) Supply increases as price falls. Supply decreases as price rises.
c) Quantity supplied rises as price falls, other things constant. Quantity supplied falls as price increases, other things constant.
d) Supply increases as price increases. Supply decreases as price decreases
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4) If marginal cost is increasing, what do we know about average cost?
a) If marginal cost is increasing, average costs could be rising, falling, or constant. The direction of average costs depends upon whether marginal cost is higher or lower than average cost.
b) If marginal cost is increasing, average costs are rising. As the cost of the next item produced is rising, the average cost of all the items produced must also be rising.
c) If marginal cost is increasing, average costs are falling. Marginal costs only increase at very high levels of production. When items are mass-produced (because of economies of scale) their average costs always fall, even when marginal costs begin to increase.
d) Average cost is constant and always lower than marginal cost because of the law of decreasing marginal productivity. As more items are produced marginal costs increase (the same as productivity decreasing), but average costs remain constant because the total number of items produced is also increasing
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5) (The president of Lebanon Valley College proposed the following tuition program: provide a 50 percent tuition reduction for those graduating in the top 10 percent of their high school class, 33 percent reduction for those in the top 20 percent, and 25 percent reduction for those in the top 30 percent. All scholarship recipients were also required to maintain a minimum GPA. The comptroller estimated that the elasticity of demand for these students was greater than 1.)
Why did the program distinguish among top-performing students?
A) The program distinguished among top students because they were the least likely to respond to scholarships, keeping expenses related to scholarships down.
B) The program distinguished among top students because the top students demanded greater scholarships. The only way to achieve equilibrium was to supply more scholarships to these students.
C) The program distinguished among top students because their elasticities likely differed. The top 10 percent were likely being offered scholarships at other academic institutions, giving them greater choices, which made their elasticities greater.
D) The program distinguished among top students because their elasticities likely differed. The top 10 percent were likely being offered scholarships at other academic institutions, giving them greater choices, which made their elasticities lower.
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6) Say that equilibrium price fell and quantity remained constant. What would you say was the most likely cause?
a) The supply curve shifted left and the demand curve shifted left.
b) The supply curve shifted right and the demand curve shifted right.
c) The supply curve shifted right and the demand curve shifted left.
d) The supply curve shifted left and the demand curve shifted right.
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7) A firm has just decreased its price by 10 percent over last year's price, and it found that quantity sold decreased 20%. What The firm comes to you and wants to know its price elasticity of demand ?
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8) Name two advantages of the behavioral model.
Select all that apply.
a) They better match observed behavior.
b) Each model depends on a specific context and they are not easily generalized to other contexts.
c) Broader building blocks free researchers to look for more patterns in the data.
d) Irrational behavior results in complicated models that are often difficult to solve.
e) They assume people are rational, which better matches reality.
f) All economists agree the assumptions of the behavioral model are realistic.
