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CHAPTER 5 - Answer
CHAPTER 5 - Answer
CHAPTER 5
APPLICATIONS OF MICROECONOMICS
THEORYAS A BASIS FOR UNDERSTANDING THE
KEY ECONOMIC VARIABLES AFFECTING THE BUSINESS
I. Questions
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Chapter 5 Applications of Microeconomics Theory as a Basis for Understanding
e) Level of price. If the ruling price is toward the upper end of the
demand curve, demand is likely to be more elastic than if it were
toward the lower end. This is always true for a negatively sloped
straight-line demand curve and is usually true for curvilinear
demand curves.
5. The longer the period of adjustment allowed for a change in the price of
a commodity, the more elastic the supply curve of the commodity is
likely to be. This is so because it takes time for producers to respond to
price changes.
6. The answer depends on the price elasticity of demand for taxi rides in
Metro Manila. If the demand for taxi rides is price inelastic, the decision
was correct. If demand is elastic, then increasing taxi fares reduces the
total revenue of taxi owners. In order to see what happened to the total
profits of taxi owners, we must compare this decrease in total revenue
with the change in total costs (higher wages for taxi drivers but fewer
taxis and fewer taxi drivers). Unfortunately, in the real world we often do
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Applications of Microeconomics Theory as a Basis for Understanding Chapter 5
b. For the inputs which the firm purchases or hires, the firm must pay a
price at least equal to what these same inputs could earn in their best
alternative use. Otherwise, the firm could not purchase them or retain
them for its use. Thus the cost to the firm involved in the use of any
input, whether owned by the firm (implicit cost) or purchased
(explicit cost), is equal to what the same input could earn in its best
alternative use. This is the alternative or opportunity cost doctrine.
We assume that factor prices remain constant regardless of the
quantity of each factor demanded by the firm per unit of time. That
is, we assume that the firm is a perfect competitor in the factor
market.
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Chapter 5 Applications of Microeconomics Theory as a Basis for Understanding
10. Prices reflect marginal value, not total value. The marginal value of a
good is the maximum amount a consumer would be willing to pay for a
specific unit. The height of the demand curve reflects the value
consumers place on each unit. The total value is the total benefit
consumers derive from all units consumed. The area under the demand
curve for the number of units consumed reflects the total value. Water
provides an example of a good with high total value but low marginal
value. With regard to the last question, are there more nurses or
professional wrestlers?
11. Neither markets nor the political process leaves the determination of
winners and losers to chance. Under market organization, business
winners and losers are determined by the decentralized choices of
millions of consumers who use their million votes to reward firms that
provide preferred goods at a low cost and penalize others who fail to do
so. Under political decision making, the winners and losers are
determined by political officials who use taxes, subsidies, regulations and
mandates to favor some businesses and penalize others.
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Applications of Microeconomics Theory as a Basis for Understanding Chapter 5
1. A 12. D
2. D 13. C
3. C 14. C
4. B 15. D
5. A 16. D
6. D 17. B
7. C 18. D
8. B 19. B
9. A 20. D
10. A 21. C
11. C 22. D
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