Economics Answers

Assume that a college student purchases only Red Bull and Mars bars. If both Red Bull and Mars bars are normal goods, the income effect associated with a decrease in the price of a Mars will result in:A an increase in the consumption of Mars and a decrease in the consumption of Red Bull.
B an increase in the consumption of Mars and an increase in the consumption of Red Bull.
C a decrease in the consumption of Mars and a decrease in the consumption of Red Bull.
D a decrease in the consumption of Mars and an increase in the consumption of Red Bull.

35 Assume a college student purchases only Soft Drinks and Burgers. The substitution effect of an increase in the price of burgers will result in:

A A decrease in the consumption of burgers and an decrease in the consumption of soft drinks.
B A decrease in the consumption of burgers and an increase in the consumption of soft drinks.
C A decrease in the consumption of burgers and no change in the consumption of soft drinks.
D A decrease in the consumption of soft drinks only.


36 Assume that a college student purchases only Red Bull and Mars bars The substitution effect associated with a decrease in the price of a Mars will result in:

A an increase in the consumption of Mars and an increase in the consumption of Red Bull.
B an increase in the consumption of Mars and a decrease in the consumption of Red Bull .
C only a decrease in the consumption of Red Bull .
D only an increase in the consumption of Mars .

If the price of the good represented on the Y axis increases by 15 percent, that represented on the X axis increases by 5 percent and nominal income increases by 10 percent.

A The budget constraint will shift inward and become flatter
B The budget constraint will shift inwards and become steeper
C The budget constraint will rotate and become flatter
D The budget constraint will rotate and become steeper

If the price of the good represented on the Y axis increases by 15 percent, that represented on the X axis increases by 10 percent and nominal income increases by 20 percent.

A The budget constraint will shift outwards and become flatter
B The budget constraint will shift outwards and become steeper
C The budget constraint will shift inwards and become flatter
D The budget constraint will rotate and become steeper


20 If the price of the good represented on the Y axis decreases by 15 percent, that represented on the X axis decreases by 10 percent and nominal income decreases by 20 percent.

A The budget constraint will shift outwards and become flatter
B The budget constraint will shift outwards and become steeper
C The budget constraint will shift inwards and become flatter
D The budget constraint will shift inwards and become steeper

A cold summer has reduced the demand for beer; at the same time a tax is placed on alcohol. What can we say about the equilibrium price and quantity of alcohol?

A Equilibrium price rises, equilibrium quantity falls
B Equilibrium price falls, equilibrium quantity is unknown
C We cannot say what will happen to equilibrium prices but know that equilibrium quantity will fall
D We cannot say what will happen to equilibrium prices or equilibrium quantity

In neoclassical microeconomics it is assumed that the prices rational agents respond to are:

A Its absolute level on any given day
B Its absolute level on any given day divided by the relevant price index
C Its absolute level on any given day minus any external costs of the production of the good
D Its price relative to the prices of other goods and services

7 In neoclassical microeconomics it is assumed that the rational agents make decisions based on:

A Average net returns to a prospective action
B Marginal net returns to a prospective action
C Costs already incurred
D None of the above because neoclassical microeconomics does not assume rational behaviour

Tom has an income of £1000 which he spends as follows:
80% goes on necessities and 20% on luxuries. If his income elasticity of demand for necessities is 0.5 and his income falls by 20 percent then:

A How much will Tom spend on necessities after the income fall? (4 marks)







B How much will Tom spend on luxuries after the income fall? (1 mark)




C Are necessities a normal or an inferior good? (1 mark)




D What is Tom’s income elasticity of demand for luxuries? (4 marks)

A detailed solution i.e with working for the below question:

Q: For the production function Q=20K^0.5 L^0.5, determine four combination of capital and labor that will produce 100 and 200 units of output. Plot these points on a graph and use them to sketch the 100 and 200 unit isoquants.

Ans: If the production function is Q=20K^0.5 L^0.5, then four combination of capital and labor that will produce 100 and 200 units of output will be (K;L):
Q = 100 units: (1;25), (25;1), (6.25;2), (2;6.25);
Q = 200 units: (1;100), (100;1), (25;2), (2;25).

Other factors remaining the same, what would happen to the supply of a particular product if the following changes occur?
1.The price of the product falls.
2.A technological breakthrough enables the good to be produced at a significantly lower cost.
3.The prices of inputs used to produce the product increase.
4.The price of a product that is a substitute in production decreases.
5.The managers of firms that produce the good expect the price of the good to rise in the near future.
6. Firms in the industry purchase more plant and equipment, increasing the productive capacity in the industry.

Tom has an income of £400 which he spends as follows:
40% goes on good X and 60% on good Y. The price of good Y is 80 per cent of the price of good X which is £5. The price of good Y rises by 25 per cent and Tom’s nominal income rises by 15 per cent. Which of the following new consumption patterns would indicate inconsistent preferences by Tom.


A He consumes 32 of X and 60 of Y
B He consumes 40 of X and 52 of Y
C He consumes 25 of X and 67 of Y
D None of the above