#1 If an increase in the price of Nike shoes increases the demand for adidas sho

Question

#1 If an increase in the price of Nike shoes increases the demand for adidas shoes this means that:

A) Nike shoes and adidas shoes are inferior goods

B) Nike shoes and adidas shoes are normal goods

C) Nike shoes and adidas shoes are substitutes

#2 Which of the following statements are positive:

A) There is a limit to the income each year to which the FICA tax supplies, but that is fair, since there is a limit to social security benefits

B) I am absolutely positive that there is a better way

C) Social security benefits are not taxed

#3 Suppose demand for monopoly's product falls so that its profit-maximizing price is below average cost. How much output should the firm supply

A) it should increase output

B) it should decrease output

C) it should shut down and produce no output

Explanation / Answer

1) Inferior goods are those whose demand increases as price increase or demand decrease while price decreases. Eg : course grains. Normal goods are those goods whose demand increases as price falls and demand falls as price increases. Two goods are substitutes if demand for good 1 increases if price of good 2 falls and vice-versa. Here since increase in price of adidas shoes increase demand for nike shoes, adidas shoes and nike shoes are substitutes.

2) Positive statements are fact-based while normative statements are subjective and value-based. Thus, statement C is a positive statement.

3) Whenever profit maximizing price is below the average cost, the firm should shut down. This is because at this point the firm would be dealing in losses.

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