Economics - Study Mode

[#1006] The elasticity of substitution between two perfect substitutions is
Correct Answer

(D) Infinity

Explanation

Solution: The elasticity of substitution between two perfect substitutions is Infinity. Elasticity of factor substitution can take any value from zero to infinity, always being positive.

[#1007] Which of the following is NOT a characteristic of perfect competition?
Correct Answer

(D) An individual firm can influence the price

Explanation

Solution: An individual firm can influence the price is not a characteristic of perfect competition. All goods in a perfectly competitive market are considered perfect substitutes, and the demand curve is perfectly elastic for each of the small, individual firms that participate in the market. These firms are price takers–if one firm tries to raise its price, there would be no demand for that firm's product.

[#1008] When marginal revenue is zero, total revenue is
Correct Answer

(A) Maximum

Explanation

Solution: When marginal revenue is zero, total revenue is Maximum. The profit maximizing quantity and price can be determined by setting marginal revenue equal to zero, which occurs at the maximal level of output. Marginal revenue equals zero when the total revenue curve has reached its maximum value.

[#1009] Which one is increasing function of price?
Correct Answer

(C) Supply

Explanation

Solution: Supply is increasing function of price. The higher the price of a good, the more a firm is willing to produce and offer, hence, the supply function is upward sloping. In fact, in the perfect competition market, the supply curve is the marginal cost curve. Increasing production is only profitable if the good can be sold at a higher price.

[#1010] The consumer is in equilibrium at a point where the budget line
Correct Answer

(C) Is tangent to an indifference curve

Explanation

Solution: The consumer is in equilibrium at a point where the budget line is tangent to an indifference curve. It means that marginal substitution rate between X and Y (MRSXY) should be diminishing.