Q1W11AnswersExplained

Q1W11AnswersExplained - Quiz 1, Winter 2011 True-False...

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Quiz 1, Winter 2011 True-False Questions: 1. For a consumer, the opportunity cost of purchasing a good includes the value of the time he or she must spend to acquire the good, but it does not include the money he or she must pay for the good. Answer: False The opportunity cost of an action is the value of foregone opportunities if the action is taken. If that action entails the payment of money, such as in purchasing a good, you are forgoing the other goods and services that money could have purchased. I referred to these money payments as direct costs in lecture. Direct costs are certainly part of opportunity costs. 2. The Law of Demand holds that an increase in the incomes of consumers increases their demand for a good. Answer: False As stated on page 62 of Taylor, “Economists refer to the relationship that a higher price leads to a lower quantity demanded as the law of demand.” The law of demand is about the effect of changes in the price of a good, not the effect of changes in income. 3. If a series of trades among buyers and sellers results in an efficient outcome, it is impossible to find a rearrangement of those trades that would make at least one buyer or seller better off without making another worse off. Answer: True On page 21, Bergstrom and Miller define efficiency the following way: “A market outcome is said to be efficient if the sum of the profits made by all individuals in the market is as large as possible.” Now, suppose we have a series of trades and further suppose that it were possible to find a rearrangement of those trades that would make at least one buyer or seller better off without making another worse off. That rearrangement would then increase total profits because it would increase the profit of at least one trader without decreasing the profit of another. Because an efficient outcomes maximizes total profits, the series of trades could not have achieved an efficient outcome. A rearrangement yields higher profits.
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4. The price elasticity of the demand for milk is four times higher if the quantity of milk is measured in quarts instead of gallons. (There are four quarts in a gallon.) Answer: False The price elasticity of demand if the percentage change in quantity demanded divided by the percentage change in price moving along the demand curve. The percentage change in demand for a given change in price is the same if quantity is measured in gallons or quarters. A 10 gallon increase relative to a base of 100 gallons is a 10 percent increase. Measured in quarters, the same change is a 40 quart increase relative to a base of 400 quarts. It is still 10 percent. Price elasticity doesn’t depend on the units of measure. 5.
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This note was uploaded on 12/12/2011 for the course ECON 1 taught by Professor Bergstrom during the Fall '07 term at UCSB.

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Q1W11AnswersExplained - Quiz 1, Winter 2011 True-False...

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