Question

1. Money that must be paid for the use of factors of production such as labor and capital is an:
A) accounting profit.
B) implicit cost.
C) economic profit.
D) explicit cost.

2. Sunk costs:
A) are the same as variable costs.
B) are not considered in marginal analysis.
C) help to determine the optimal quantity of an activity.
D) can dramatically increase marginal costs.
  
3. The cross-price elasticity of demand of complementary goods is:
A) between 0 and 1.
B) greater than 0.
C) less than 0.
D) equal to 0.

4. Suppose the government imposes a $10 excise tax on the sale of sweaters by charging suppliers $10 for each sweater sold. If the demand curve is downward-sloping and the supply curve is upward-sloping:
A) the price of sweaters will decrease by $10.
B) the price of sweaters will increase by less than $10.
C) the price of sweaters will increase by $10.
D) consumers of sweaters will bear the entire burden of the tax.


5. Other things being equal, the price elasticity of demand for a product will be lower:
A) if it is a large part of the consumer's budget.
B) in the long run than in the short run.
C) if there are few or no substitutes available.
D) if many substitutes are available.

6. Which inefficiency is NOT caused by price floors?
A) illegal activity
B) wasted resources
C) inefficiently low quality
D) inefficient allocation of sales among sellers

Answer 1

1. Option D.

• Money that must be paid for the use of factors of production such as labour and capital is an explicit cost.
• Explicit costs are the costs that a firm must pay as wages, for raw materials, machineries etc.

2. Option B.

• Sunk Costs are not considered in marginal analysis.
• The sunk costs are those costs that have already been incurred and hence cannot be recovered.
• Due to this property, they are not used in marginal analysis.

3. Option C.

• The cross price elasticity of demand of complementary goods is less than 0.
• Complementary goods are those goods that complement each other or they are the goods in which, an increase in the price of one good decreases the demand of its complement and vive versa.
• The cross price elasticity of those goods are always negative.

4. Option B.

• The price of the sweaters will increase by less than $10.
• When the tax is imposed on the suppliers of sweaters, they will transfer the burden on the customers by increasing the price of sweaters sold.

5. Option C.

• Other things being equal, price elasticity of demand for a product will be lower if there are few or no substitutes.
• Price elasticity of demand measures the responsiveness of the demand of a good with respect to its changes in price.
• A good is said to be more elastic when it has many substitutes available and is less elastic when it has fewer substitutes.

6. Option C.

• Inefficiently low quality is not caused by price floors.
• Prices floors are the limits set by the government in which the firms must set the prices of goods Higher than the equilibrium price level.
• The various inefficiencies caused by price floors include :-

1. Illegal activity.
2. Wasted resources.
3. Inefficiently high quality.
4. Inefficient allocation of sales among sellers.