Question

1. The production possibility frontiers for two different national economies are drawn in the same graph and are exactly positioned on top of each other. Economy A tends to emphasize the production of consumer goods. Economy B tends to emphasize the production of capital goods. How would the two frontiers compare after a 5-year passage of time?

1. The PPFs of the two economies would be in their original position
2. The PPFs of the two economies would be farther out from the origin but on top of each other.
3. The PPF of Economy B would be farther out from the origin than the PPF of Economy A.
4. The PPF of Economy A would be farther out from the origin than the PPF of Economy B.

2. A life-saving medication that has no substitutes is likely to have a price elasticity of demand that is less than one in absolute value. Is this true or false?

3) if there is a simultaneous increase in demand and decrease in supply, it is not possible for the equilibrium price to decrease. Is this true of false?

4) A minimum wage is an example of a price floor and results in higher rates of unemployment. Is this true or false?

5) When consumers respond to a price change but the percentage change in quantity demanded (in absolute value) is smaller than the percentage change in price (in absolute value), the demand is described as being _______.

1. Unit elastic
2. Perfectly inelastic
3. Perfectly elastic
4. Inelastic
5. Elastic

6. The cross-price elasticity of demand between two goods is –1.9. This tells us these two goods are ___and _______

1. substitutes used together
2. substitutes used together
3. complements used together
4. complements, used in place of each other

Answer 1

1. c. The PPF of Economy B would be farther out from the origin than the PPF of Economy A.
(Due to investment in capital goods, economy B will produce more.)

2. True
(Demand for life saving drugs will be inelastic.)

3. True
(Equilibrium price will increase in both cases.)

4. True
(Minimum wage is price floor which leads to unemployment.)

5. d. Inelastic
(When percentage change in quantity demanded < percentage change in price then demand is inelastic.)

6. c. complements used together
(As cross price elasticity is negative so they are complements which must be used together.)