Question

Determine whether each of the following statements is TRUE or FALSE, and write a short explanation for your answer (answer should be 1-3 sentences)

1) If individuals bid more than their value in a BDM, they can risk losing money by forgoing a purchase that could have made them better off (given them more value than cost).

2) Limited input availability, low inventories, and extended time period are all factors that act to decrease price elasticity of supply (i.e., result in a more inelastic supply)

3) Cross price elasticity is positive for substitutes and negative for complements

4) Likert scales are an example of revealed preferences since individuals reveal their preferences by reporting the likeability of different product attributes

5) Unlike ranking and rating tasks, likert scales permit elicitation of willingness to pay for different products.

Answer 1

1. TRUE because the opportunity cost of forgoing a lower bid is higher. Also, now the consumer is paying a higher amount for the same commodity hence its marginal utility of money decreases.
2. FALSE because although limited input availability and low inventories are the reasons for supply inelasticity but an extended time period is not. Because, in the long run inventories can be replenished.
3. TRUE because as the price of a good increases, the relative demand of its substitute also increases. For eg, if price of coke increases, the demand for pepsi will increase. On the other hand, as the price of a good increases, the relative demand of its compliment decreases. For eg, If price of petrol increases, the demand for cars decreases. Hence, cross price elasticity is positive for substitutes and negative for complements.
4. TRUE Likert scales are an example of revealed preferences as the individuals reveal their preferences by reporting the likeability of different product attributes. There are a form of surveys conducted with a motive to analyse the market demand and the review of a particular product.