Question

1.Suppose the income elasticity of demand of jewelry is 6 and assume that jewelry is a normal good, for a 5% increase in income, what will happen to the quantity demanded of jewelry?

	A.	The quantity demanded of jewelry will decrease by 6%
	B.	The quantity demanded of jewelry will decrease by 30%
	C.	The quantity demanded of jewelry will increase by 30%
	D.	The quantity demanded of jewelry will increase by 6%
	E.	The quantity demanded of jewelry will increase by 5%

2.Which of the following is true?

	A.	Inferior goods have positive income elasticity of demand
	B.	If the cross price elasticity of demand is negative, these two goods are complements
	C.	If the cross price elasticity of demand is positive, these two goods are complements.
	D.	Necessities tend to be more income elastic than luxuries
	E.	If the cross price elasticity of demand is negative, these two goods are substitutes.

3. At Mcdonald, as the price of grilled chicken salad increases from $4 to $6 while the quantity demanded of Big Mac rises from 700 to 900 a day. Which of the following is NOT true?

	A.	The cross elasticity of demand is 5/8
	B.	At Mcdonald, grilled chicken salad and Big Mac are substitutes.
	C.	For every 10% increase in the price of grilled chicken salad, we should expect to see a 6.25% increase in the quantity demanded of Big Mac.
	D.	We can tell from the above information that Big Mac is a normal good.
	E.	none of the above

4. Which of the following is true?

	A.	The law of diminishing marginal returns states that when successive equal amounts of a variable resource are combined with a fixed amount of another resource, marginal increase in output that can be attributed to each additional unit of the variable resource will eventually decline.
	B.	The amount of fixed inputs does not change with the amount of output
	C.	The slope of a production function curve is positive but the slope decreases with the amount of inputs
	D.	According to the law of diminishing marginal returns, as more inputs are added, the total output increases at a decreasing rate.
	E.	All of the above

5. Which of the following is NOT true?

	A.	Total cost is the sum of fixed cost and total variable cost
	B.	A cost function shows the relationship between total cost and the quantity of output
	C.	A cost function is downward sloping because of the law of diminishing marginal returns
	D.	Average total cost can be obtained by dividing total cost by the quantity of output
	E.	Total cost is positively related to the quantity of output

Answer 1

1. C) The quantity demanded of jewelry will increase by 30%

As Income elasticity= percentage change in quantity demanded/ percentage change in income

2. B )If the cross price elasticity of demand is negative, these two goods are complements

3.

A.

The cross elasticity of demand is 5/8
As calculated it is 4/7 or 0.57

4.E). All of the above

5) C) A cost function is downward sloping because of the law of diminishing marginal returns.