Question

1a. Assume that unfavorable weather conditions decrease the supply of tomatoes. Noting that tomatoes are the key ingredient in the production of tomato sauce, and that spaghetti is a complement for tomato sauce, which of the following would you expect?

A The price of tomatoes would increase, the supply of tomato sauce would decrease, and the demand for spaghetti would increase.

B The price of tomatoes would increase, the supply of tomato sauce would decrease, and the demand for spaghetti would decrease.

C The price of tomatoes would increase, the supply of tomato sauce would increase, and the demand for spaghetti would decrease.

D The price of tomatoes would decrease, the supply of tomato sauce would increase, and the demand for spaghetti would increase.

E The price of tomatoes would increase, the supply of tomato sauce would increase, and the demand for spaghetti would increase.

1B Rory has a store in which he sells two goods: castor oil and Snickers bars. He has found that: (a) castor oil is a “bad” (i.e., more is worse than less), and a Snickers bar is a “good” (i.e., more is better than less); and (b) the amount of castor oil consumed is negatively related to consumer income, and the amount of Snickers bars consumed is positively related to consumer income. Based on this information, it can be concluded that

A A Snickers bar is an inferior good.

B The indifference curves for castor oil and Snickers bars have convex shapes.

C The Engel curve for Snickers bars is positively sloped.

D The Engel curve for castor oil is positively sloped.

E Castor oil is a normal good.

1c.Suppose the exchange rate between the U.S. dollar and Canadian dollar changes from 1 U.S. dollar = 1.20 Canadian dollar to 1 U.S. dollar = 1.40 Canadian dollar. As a result of the indicated change in the exchange rate,

A Canadian exports to the U.S. would decrease, and U.S. exports to Canada would decrease.

B Canadian exports to the U.S. would decrease, and U.S. exports to Canada would increase.

C there would be no change in both Canadian exports to the U.S. and U.S. exports to Canada.

D Canadian exports to the U.S. would increase, and U.S. exports to Canada would decrease.

E Canadian exports to the U.S. would increase, and U.S. exports to Canada would increase.

1D A researcher has found that car buyers are less inclined to purchase the “classic edition” of a particular car after they observe that other individuals have already purchased it. This suggests that the “class edition” of the car

A is an economic “bad”.

B is subject to negative network externalities.

C is an inferior good.

D has a positively sloped demand curve.

E is subject to positive network externalities.

Answer 1

QUESTION 1 : Assume that unfavorable weather conditions decrease the supply of tomatoes. Noting that tomatoes are the key ingredient in the production of tomato sauce, and that spaghetti is a complement for tomato sauce, which of the following would you expect?

ANSWER : OPTION B ; The price of tomatoes would increase, the supply of tomato sauce would decrease, and the demand for spaghetti would decrease.

We know that for complimentary goods they have joint demand. When demand for one increases the demand for other will also increase and vice versa. Here when the supply of tomato decreases due to unfavorable weather conditions, its price will definitely increase. Since tomato was a major ingredient in the production of tomato sauce, price of tomato sauce will also increase. So when price of a goods increases we know that its demand will fall. This fall in demand of tomato sauce will lead to fall in demand for spaghetti because tomato sauce and spaghetti are complimentary goods and have joint demand.