If a good is inferior in an economic sense, income elasticity will:
a. be less than one.
b. exceed one.
c. be zero.
d. be inelastic.
e. be negative.
QUESTION 2In the short run, why would a firm in a perfectly competitive market shut down production if the prevailing market price falls below the lowest possible average variable cost?
a. At that point (economic) profit is zero.
b. Below that point average revenue becomes less than marginal revenue.
c. Below that point marginal revenue becomes insufficient to pay for avoidable average variable cost.
d. Below that point other firms with similar cost will find it profitable to enter the market and take away demand from the existing firms.
QUESTION 3A good is classified as inferior if:
a. consumers buy less when the price rises.
b. consumers buy less when income rises.
c. consumers buy less when the price falls.
d. consumers buy more when income rises.
e. better quality goods exist.
QUESTION 4In short-run perfectly competitive equilibrium, which of the following is alwaystrue?
a. Profit equals zero.
b. Profit can be negative, zero, or positive.
c. Profit can be zero or positive, but not negative.
d. Profit is positive, otherwise firms would not produce.
QUESTION 5The number of CDs purchased increased by 50 percent when consumer income increased by 10 percent. Assuming other factors are held constant, CDs would be classified as:
a. social goods.
b. normal goods.
c. Giffen goods.
d. inferior goods.
QUESTION 6Which of the following offers the fullest explanation of why price equals marginal cost is the rule from marginal analysis that indicates the profit-maximizing output level?
a. If output were reduced from the profit-maximizing level, then the firm would be giving up marginal revenue that exceeds marginal cost, and thus reducing the level of profit.
b. If output were increased from the profit-maximizing level, then the firm would be gaining marginal revenue that is less than the marginal cost incurred in producing this additional unit, and thus reducing the level of profit.
c. Because the firm colludes with other similar firms to set price equal to marginal cost.
d. Both a. and b. above are correct.
QUESTION 7The income elasticity of demand for shoes is estimated to be 1.50 . We can conclude that shoes:
a. have a relatively steep demand curve.
b. have a relatively flat demand curve
c. are a normal good.
d. are an inferior good.
QUESTION 8Profit is maximized when which of the following conditions occurs?
a. Total revenue equals total cost.
b. Average revenue equals average cost.
c. Marginal revenue equals marginal cost.
d. Both b. and c. above are correct.
QUESTION 9For which of the following medical goods or services is the income elasticity of demand largest?
a. Emergency services after a car accident.
b. Measles shots.
c. Physical examinations for life insurance applications.
d. Medical tests to diagnose specific symptoms.
e. Face-lifts.
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