When a firm is experiencing diminishing marginal returns:
A. average cost is increasing.
B. average cost is decreasing.
C. marginal costs are increasing.
D. marginal costs are decreasing.
Answer: C
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Suppose voter preferences over a public good funded through a proportional income tax are single peaked. If everyone has the same tastes and the public good is a normal good, then ideal points for higher income individuals will lie to the right of ideal points of lower income individuals.
Answer the following statement true (T) or false (F)
The income elasticity of demand for haircuts is 1.5, and the income elas-ticity of demand for food is 0.14 . You take a weekend job, and the income you have to spend on food and haircuts doubles
If the prices of food and haircuts remain the same, will you double your expenditure on haircuts and double your expenditure on food? Explain why or why not.
Most of the debates in the U.S. Congress center on
A) efficiency concerns. B) equity concerns. C) both efficiency and equity equally. D) market inefficiency.
Return to the situation with the executive from the previous question. Now assume that shareholders cannot observe effort, so cannot specify how hard the executive works in the contract but must induce it through the incentive scheme. Which of the following wage contracts would work out best for shareholders in equilibrium?
a. A flat wage w = 2,500 with no profit share. b. A share of 35% of the gross profits. c. A share of 55% of the gross profits. d. A share of 70% of the gross profits.