How does the relative price and a household's real income influence its budget line?
What will be an ideal response?
The magnitude of the slope of the budget line equals the relative price of the good or service measured on the horizontal axis. A fall in the price of the good measured on the horizontal (vertical) axis decreases that good's relative price and decreases (increases) the slope of the budget line. A household's real income is the household's income expressed as a quantity of goods the household can afford to buy. An increase (decrease) in household income causes a parallel shift of the budget line rightward (leftward). The slope of the budget line does not change when income changes.
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The cross-elasticity of demand between Homer's Holesome Doughnuts and Krusty's Krispy Crullers is 5.0, which indicates that Homer's doughnuts and Krusty's crullers are
A) complements and the relationship between the two goods is strong (that is, the quantity demanded of doughnuts is very responsive to changes in the price of crullers). B) complements and the relationship between the two goods is weak (that is, the quantity demanded of doughnuts is not very responsive to changes in the price of crullers). C) substitutes and the relationship between the two goods is strong (that is, the quantity demanded of doughnuts is very responsive to changes in the price of crullers). D) substitutes and the relationship between the two goods is weak (that is, the quantity demanded of doughnuts is not very responsive to changes in the price of crullers).
If firms sell exactly what they expected to sell, all of the following will be true except
A) aggregate expenditure will be greater than GDP. B) there is no unplanned change in inventories. C) aggregate expenditure will be equal to GDP. D) inventories will not change, and GDP and employment will remain stable.
Identify the correct statement form the following
a. Governance prevents buyers in the market from switching between sellers. b. The cost of ending a relationship with a buyer in the market is always high for sellers. c. Goods and the parties involved in market transactions are not interchangeable. d. At market-clearing prices participants can rest assured that shortages or surpluses will not frustrate their expectations.
In their surveys of consumers, Daniel Kahneman, Jack Knetsch and Richard Thaler found that
A) most people considered it unfair for firms to raise their prices because of an increase in their costs, but fair to raise their prices after an increase in demand. B) most people considered any increase in price to be unfair as it led to an increase in profits. C) most people believed that low-income people were hurt most by increases in prices. D) most people considered an increase in price by firms following an increase in their costs to be fair but believed it was unfair for firms to raise their prices because of an increase in demand.