Which of the following is the best example of the substitution effect?
A. Joe buys fewer apples and more oranges as the result of an increase in the price of apples.
B. Joe buys more apples when his income increases.
C. Joe buys an apple slicer when the price of apples decreases.
D. Joe buys less sugar as the result of an increase in price of apples.
Answer: A
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Classical growth theory states that
A) growth is maximized when everyone is fully employed. B) growth is followed by increases in the population, eventually leaving real GDP per person unchanged. C) growth in real GDP per person is difficult in the beginning but easier in the later stages. D) advances in technology will always insure a permanent increase in real GDP per person.
In the short run, the labor supply curve for most people slopes upward because
A) labor supply experiences increasing marginal returns. B) the substitution effect is completely offset by the income effect. C) there is a direct relationship between the quantity of labor supplied and the quantity of labor demanded. D) the substitution effect is stronger than the income effect.
When a firm is experiencing diseconomies of scale, long-run
a. average total cost is minimized. b. average total cost is greater than long-run marginal cost. c. average total cost is less than long-run marginal cost. d. marginal cost is minimized.
Psychologists Daniel Kahneman and Amos Tversky conducted the following experiments by asking a sample of people the following questions:
Scenario A: "Imagine that you have decided to see a play and paid the admission price of $10 per ticket. As you enter the theater you discover that you have lost the ticket. The seat was not marked and the ticket cannot be recovered. Would you pay $10 for another ticket?" Scenario B: "Imagine that you have decided to see a play where admission is $10 per ticket. As you enter the theater you discover that you have lost a $10 bill. Would you still pay $10 for a ticket for the play?" As long as additional tickets are available, there's no meaningful difference between losing $10 in cash before buying a ticket, and losing the $10 ticket after buying it. In both cases, you are out $10. Yet, far more subjects (88 percent) in Scenario B say they would pay $10 for another ticket and see the play while in Scenario A, only 46 percent of the subjects say they would be willing to spend another $10 to see the play. Which of the following is the best explanation for the results of the experiment? A) The endowment effect applies in Scenario A since people already own the ticket and therefore it is more valuable but this is not so in Scenario B. B) In Scenario B, people had not anticipated spending an additional $10 so in effect the price of the ticket is $20 and not $10 whereas in Scenario A, the price of the ticket is still $10. C) In Scenario A, people make an immediate connection between the lost ticket and the play and feel poorer by incorrectly assigning a greater value to the value of the ticket whereas in Scenario B, they do not make the connection between the lost $10 bill and the play. D) The net benefit derived from watching the play is lower in Scenario A where the effective cost is $20 compared to the net benefit in Scenario B.