ECAM 301 final

Suppose you spent all your income purchasing good Y and nothing on good X. Which of the following equations would accurately represent this?

• I-(PX/Py)

• I/Py

• I-Py

• (I-Py)/Px

Answer explanation

This is showing you the intercept on the y- and x-axis by taking your income (I) and dividing it by the price of the good (Py). For example, you earn $40 and beef sticks is $5 ; 40/5 = 8 meaning that if you spent all $40 on $5 beef sticks, you could buy 8 of them

Evaluate the following statement: "An indifference curve which intersects the budget line at 2 points is at optimum and maximizes your utility"

• true

• false

Answer explanation

• This is the optimum point where the slope of the indifference curve and slope of the budget line is equal

Evaluate the following statement: "An upward sloping indifference curve shows that you will have the same level of utility regardless of whether you have a low or high amount of both goods"

• true

• false

The _________ is defined as "aggregating all other goods except one into a single category"

• Compsite-good convention

• Basket of goods below the budget line

• Point of tangency

• Basket of goods above the indifference curve

Evaluate the following statement: "For the isocost line, it is assumed that firms can decide how much to spend and therefore shift their isocost curve inwards or outwards"

• True

• False

Answer explanation

• Firms can set their budget and choose how much it spends

  • -Unlike the consumer which assumes spends all their income

  • -Individuals pursue consumption for utility maximization

    • -Assume you spend everything to reach that objective

    • -This includes savings, rent, misc. spending, etc.

  • -Firms pursue profit maximization

    • -Firm can “afford” to spend as it will to maximize profit 

Average cost is decreasing when marginal cost is _________ average cost

• greater than

• less than

• equal to

• intersects

Giffen and ordinary goods focus on the relationship between ________ and quantity demanded, whereas normal and inferior goods focus on _______ and consumption

• price; income

• income; price

• quantity supplied; income

• quantity supplied; price

Answer explanation

• Giffen good: Goods that violate the law of demand where quantity demanded increases when price increases

• Ordinary goods: Goods that obey the law of demand, when price goes up, demand goes down

• Inferior good: A good you consume less of when income rises

• Normal good: When income goes up, consumption goes down

A 1% increase in income which leads you to consume 10% more olives will have:

• income elasticity greater than 1

• income elasticity less than 1

• price elasticity greater than 1

• price elasticity less than 1

Answer explanation

Price Elasticity: % change in quantity/% change in price

• greater than 1:     Elastic              → quantity demanded is sensitive to price changes

• less than 1 :     Inelastic           → quantity demanded is insensitive to price changes 

Evaluate the following statement: "In constant-cost industry in the short-run, a rightward shift in the market demand curve will lead to a smaller increase in the quantity supplied by a firm compared to the long run"

• true

• false

According to the efficiency criterion, votes were weighted according to individuals:

• willingness to pay

• consumers surplus

• deadweight loss

• producer surplus

Answer explanation

• Efficiency criterion: A normative criterion where votes are weighted according to your willingness to pay for an outcome