Question One (25 marks) a) Indicate whether the following statements are true or false. Provide an...

Question One a) Indicate whether the following statements are true or false. Provide an explanation for your answer: i. In a perfectly competitive market an increase in demand for a product may increase prices in the short run but not in the long run. ii. The "invisible hand" is a metaphor for how societies create laws to regulate what and how things are produced in an economy. iii. The opportunity cost of an item or an action is always equal to the amount of money a person pays to enjoy that item or action. iv. Price is determined by the interaction of demand and supply. v. The opportunity cost of a choice is the value of the forgone alternative that was not chosen. (3 marks

Expert Solution

1) It is true that increase in demand in short run shift aggregate demand curve to its right from AD to AD1 which raise price level from P to P1 and raise output level from Y to Y1. In long run, producers wil raise their aggregate supply of goods which will shift supply curve to its right and reduce price to its initial level.

2) Invisible hand helps in determining the shift in demand and supply curve which make market dynamic. Thus, this statement is false.

3) Opportunity cost of an item is more or less than the price they pay for the product as rise in consumption of one go od raise opportunity cost of that good because consumer will have to leave more units of other good. Thus, this statement is false.

4) It is true that price is determined by interaction of demand and supply. Thus, statement is correct.

5) It is true that opportunity cost is the value of foregone alternative that was not chosen against what you have consumed.

Rahul Sunny answered 2 years ago

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