Question

1. If the demand for good X increases by 20% when income increases by 40%, we can say that:

a. income elasticity is 2, and the good is an inferior good

b. income elasticity is 2, and the good is a normal good

c. income elasticity is 1/2, and the good is a normal good

d. income elasticity is 1/2, and the good is an inferior good

2.

A monopoly has the following data:

P=$10, MR = $6

MC = $6; ATC =$8, Q = 100. The firm is making a profit or loss? How much?

a. $800 loss

b. $200 loss

c. $800 profit

d. $200 profit

3. A monopoly faces a demand curve like:

Price	Quantity Demanded
50	1
35	2
20	3
5	4

if it finds that it's MR = MC occurs at Q = 3, what is the profit that the firm will make?

a. $60

. b. $20

c. insufficient information

d. $6.66

Answer 1

1.Ans: c) income elasticity is 1/2, and the good is a normal good

Explanation:

Income elasticity of demand = % Change in quantity demanded / % Change in Income

= 20 / 40

= 1/2

There is a direct relationship between demand for normal good and income. It means demand for normal good increase with an increase in income and vice versa.

2.Ans:  d) $200 profit

Explanation:

At profit maximizing level of output , 100 units;

Total revenue = Price * Quantity = $10 * 100 = $1000

Total Cost = ATC * Quantity = $8 * 100 = $800

Profit = Total Revenue - Total Cost = $1000 - $800 = $200

3.Ans: c)  insufficient information

Explanation:

To know the profit , there must be information about total cost or average total cost . Here , Price is given but there is no information regarding total cost or average total cost.

Proift / Loss = Total revenue - Total cost