1. You have decided that for Halloween you wanted to dress up as a Pumpkin. You
ID: 1098866 • Letter: 1
Question
1. You have decided that for Halloween you wanted to dress up as a Pumpkin. You estimated that it would cost $80 to purchase all the pieced of the costume. After spending $ 40 on the costume you realize that the orange shoes you need to complete the costume will cost you $ 50. Thus, the marginal cost of completing the costume is,
(a) 10
(b) 50
(c) 80
(d) 85
2.What effect is working when the price of a good decreses and consumers tend to buy it instead of other goods?
(a) the income effect
(b) the substitution effect
(c) the diminishing marginal utlity effect
(d) the ceteris paribus effect
3) The price of burgers increases by 22% and the quantity of burgers demanded falls by 17%. this indicated that demand for burgers is
(a) elastic
(b) inelastic
(c) unitarily elastic
(d) perfectly elastic
4 A demand relationship in which the percentage change in quantity demanded is the same as the percentage change in price is
(a) perfectly elastic
(b) unitarily elastic
(c) perfectly inelastic
(d) relatively inelastic
Explanation / Answer
1. (b) 50
Marginal cost = Cost required to complete = Cost of orange shoes = $50
2. (b) the substitution effect
When the price of good goes down, it becomes relatively cheaper to other goods. Hence, people shift their consumption from other goods to this good, or in other words, substitute the cheaper good for other goods. This is called substitution effect.
3. (b) inelastic
Elasticity = % change in demand / % change in prices = -17% / 22% = -0.77
The magnitude of elasticity (0.77) is less than 1 hence, this is inelastic.
4. (b) unitarily elastic
Elasticity = % change in demand / % change in prices, when % change in demand = % change in prices, elasticity = 1. Hence, unitary elastic.
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