A1-2. True. Because of the circular flow of income, an increase in household income will result in households spending more in the goods and services market, resulting in increased revenues for firms, illustrated in the diagram below. Subsequently, firms would require more factors of production to keep up with increased household consumption, resulting in further increases in household income. The overall effect of this injection would be an increase in consumption and thus in aggregate demand (AD=C+I+G+(X-M), of which consumption is a component.
A1-3. True. This statement is a purely positive economic statement because it makes an objective statement based on actual facts about the effect of levying a tax on gasoline on pollution emissions. No value judgments are necessary to assess the truth of the statement.
A1-4. False. While Japan may have an absolute advantage in both cell phone and computer production, what matters in determining the likelihood of trade is comparative advantage. This is based on opportunity cost rather than absolute costs. Let C represent a computer and P represent a cell phone. Japan’s opportunity cost of producing a cell phone in terms of computers is , while Finland’s is . Since Finland’s opportunity cost for producing a cell phone is less than Japan’s, Finland will produce a surplus of cell phones and trade with Japan for computers, which Japan is the low cost producer in.
A1-5: Uncertain. Opening an economy to trade does not necessarily benefit everyone in the economy. While the economy as a whole may have access to more goods and services, certain firms may not be able to compete with international competitors due to factors such as competitive advantage, economies of scale, and differing factor endowments. This information must be known in order to make a judgment.
A1-6: False. An increase in consumer income will result in an increase in demand for normal goods, but for inferior goods it will have the opposite effect. Grocery stores are likely to sell both normal (i.e. steak) and inferior (i.e. Ramen noodles) goods. The effect of increased household income on the Ramen market is shown below:
The decrease in demand from D to D’ would cause a decrease in quantity of Ramen sold from Q1 to Q2, and a decrease in price from P1 to P2. Thus an increase in consumer incomes would cause the price of inferior goods in a grocery store to fall.
A1-7: False. An expected increase in the price of houses in the housing market will cause an outward shift in the demand curve for houses, since buyers want to buy now at a discount to the future price. The shift in demand is shown below:
A shift in the demand for houses from D to D’ results in an increase in the quantity of houses sold from Q1 to Q2 and an increase in price from P1 to P2. Because of this, we can be certain that both the price of houses will increase and more houses will be traded.
A1-8: False. The assumption that all demand curves are downward sloping is incorrect. While the majority of demand curves follow the law of demand, there are exceptions such as Giffen and Veblen goods that do not. For Giffen goods (i.e. rice), the good is so inferior that the income effect outweighs the substitution effect so that the demand curve is positively sloped. For Veblen goods, certain goods that convey social status are such that an increase in price will actually cause an increase in quantity demanded because of the increased status the good conveys.
a) y = 100 – (0)2
y = 100
Therefore if no x is produced, 100 y will be produced.
(0) = 100 –...