A question on an economics exam asks, "What happens in the market for jelly when the price of peanut butter increases?" Allison, an excellent student, shows the demand for jelly increasing. Is she necessarily wrong? Why or why not?
If we consider Allison's answer wrong, we are implicitly assuming that peanut butter and jelly are complements and that the demand for jelly should decrease. But suppose Allison eats peanut butter sandwiches, or she eats jelly sandwiches (tastes are subjective); in this case, she views the goods as substitutes, and her answer is correct. Good exam writers need to make explicit what they want students to assume.
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A decrease in price allows a consumer to attain a higher indifference curve
Indicate whether the statement is true or false
If the income elasticity of demand of houses is exactly 1.40 . Due to a recession, you expect incomes to drop by 25% next year. How will consumers adjust their purchase for houses?
a. Buy 35% more houses b. Buy 35% less houses c. Buy 25% more houses d. Buy 25% less houses
Which of the following can be added to profit to obtain total revenue?
a. net profit b. capital profit c. operational profit d. total cost
If $300 of new reserves generates $800 of new money in the economy, then the reserve ratio is
a. 2.7 percent. b. 12.5 percent. c. 37.5 percent. d. 40 percent.