Elasticity and Price Elasticity in Microeconomics
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Questions and Answers

What is the substitution effect?

  • The change in quantity supplied of one good that results from a change in another good's relative price
  • The change in quantity demanded of one good that results from a change in another good's relative price (correct)
  • The change in quantity demanded resulting from a change in the consumer's purchasing power
  • The change in quantity supplied resulting from a change in the producer's cost

    • What is the law of demand?

  • A direct relationship between income and quantity demanded
  • A direct relationship between price and quantity demanded
  • An inverse relationship between income and quantity demanded
  • An inverse relationship between price and quantity demanded (correct)

    • What is the income effect?

  • The change in quantity demanded resulting from a change in the consumer's purchasing power (correct)
  • The change in quantity demanded of one good that results from a change in another good's relative price
  • The change in quantity supplied of one good that results from a change in another good's relative price
  • The change in quantity supplied resulting from a change in the producer's cost

    • What is the difference between quantity demanded and demand?

    <p>Quantity demanded is a point on the demand curve, while demand is the entire curve</p> Signup and view all the answers

    What is the law of supply?

    <p>A direct relationship between price and quantity supplied</p> Signup and view all the answers

    What happens when there is a shortage in a market?

    <p>The equilibrium price increases</p> Signup and view all the answers

    What happens when there is a surplus in a market?

    <p>The equilibrium price decreases</p> Signup and view all the answers

    What is consumer surplus?

    <p>The area above equilibrium and below demand</p> Signup and view all the answers

    What is producer surplus?

    <p>The area below equilibrium and above supply</p> Signup and view all the answers

    What happens to total welfare at equilibrium?

    <p>It is maximized</p> Signup and view all the answers

    If Ex,y is positive, what can be inferred about the goods X and Y?

    <p>They are complementary.</p> Signup and view all the answers

    What is the formula for cross-price elasticity of demand?

    <p>%ΔQD X / %ΔP Y</p> Signup and view all the answers

    If Ex,y is negative, what can be inferred about the goods X and Y?

    <p>They are substitutes.</p> Signup and view all the answers

    What is the interpretation of a high cross-price elasticity of demand?

    <p>A small change in the price of good Y leads to a large change in the consumption of good X.</p> Signup and view all the answers

    What happens to the demand for good X if the price of good Y increases and Ex,y is positive?

    <p>The demand for good X increases.</p> Signup and view all the answers

    What happens to the demand for good X if the price of good Y decreases and Ex,y is positive?

    <p>The demand for good X decreases.</p> Signup and view all the answers

    What is the relationship between cross-price elasticity of demand and the concept of substitutes?

    <p>A high cross-price elasticity of demand indicates that the goods are substitutes.</p> Signup and view all the answers

    What is the relationship between cross-price elasticity of demand and the concept of complements?

    <p>A negative cross-price elasticity of demand indicates that the goods are complements.</p> Signup and view all the answers

    What is an example of two goods with a high cross-price elasticity of demand?

    <p>Coffee and tea</p> Signup and view all the answers

    What is an example of two goods with a low cross-price elasticity of demand?

    <p>Salt and pepper</p> Signup and view all the answers

    What is the term for a group of firms that formally agree not to compete with each other?

    <p>Cartel</p> Signup and view all the answers

    What is the term for the measure of what the next unit of labor brings to the firm?

    <p>Marginal Revenue Product of Labor (MRPL)</p> Signup and view all the answers

    In a perfectly competitive labor market, what is the condition for profit-maximizing resource employment?

    <p>MRPL = MRC</p> Signup and view all the answers

    What is the term for the increase in demand for an input due to an increase in demand for the good produced by that input?

    <p>Derived Demand</p> Signup and view all the answers

    What is the term for the rule that describes how producers minimize cost by finding the optimal combination of inputs?

    <p>Least-Cost Hiring Rule</p> Signup and view all the answers

    What happens to the demand for labor when the price of automated machinery decreases?

    <p>Demand for labor decreases</p> Signup and view all the answers

    What is the term for the constraint that producers face when trying to minimize cost?

    <p>Least-Cost Constraint</p> Signup and view all the answers

    What is the condition for the least-cost hiring of multiple inputs?

    <p>MPL / PL = MPK / PK</p> Signup and view all the answers

    What is the term for the graphical representation of the possible combinations of two inputs that can be used to produce a given level of output?

    <p>Isoquant</p> Signup and view all the answers

    What is the term for the change in the quantity demanded of an input due to a change in the price of a substitute input?

    <p>Substitution Effect</p> Signup and view all the answers

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