Question

1. If the demand for one good increases as the price of another good increases, how would we label the relationship between these goods?
   1. The two goods are demand complements; The cross-price elasticity of demand is negative between the two goods
   2. The two goods are demand substitutes; The cross-price elasticity of demand is negative between the two goods.
   3. The two goods are demand complements; The cross-price elasticity of demand is positive between the two goods.
   4. The two goods are demand substitutes; The cross-price elasticity of demand is positive between the two goods.
   5. None of the above.

2. If the demand for one good decreases as the price of another good increases, how would we label the relationship between these goods?
   1. The two goods are demand complements; The cross-price elasticity of demand is negative between the two goods
   2. The two goods are demand substitutes; The cross-price elasticity of demand is negative between the two goods.
   3. The two goods are demand complements; The cross-price elasticity of demand is positive between the two goods.
   4. The two goods are demand substitutes; The cross-price elasticity of demand is positive between the two goods.
   5. None of the above.

3. Perfectly competitive firms maximize their profit by operating at the level of output where:
   1. average total cost is at a minimum
   2. total revenue is at a maximum
   3. average cost equals marginal cost
   4. Price equals marginal cost
   5. All of the above.

Answer 1

Option d is correct. When there are two goods which are substitutes then increase in the price of one makes it expensive and consumers switch to the market for other good and increase its demand. this implies that increase in the price of one good increases the demand for its substitute and therefore the cross price elasticity is positive

Option d is correct. price is already equal to marginal revenue and average revenue in case of competitive market and therefore marginal revenue equal marginal cost becomes price equal marginal cost for profit maximization.