Microeconomics is the sub-field of economics that studies the behavior and decisions of the smallest decision units such as individuals or households and firms. On the other hand, Macroeconomics is the study how a country’s economy as a whole works, and it pays special attention to the effects of various policies pursued by the government. Thus, decisions about purchasing which car (cheap or expensive) and going on a holiday (abroad or in the country) by a household, and decisions about employment and advertisement expenses by a company are the subject matters of microeconomics. On the contrary, how to control inflation is the study area of macroeconomics. The correct answer is D.

Complements are the goods that go together. A decrease in the price of one causes an increase in the demand for the other. The answer is B.

Producer surplus is the difference between the price at which a firm sells its product and the cost of production. There are gains from trade to producers/sellers also. The benefit the producers get from participating in the market activity is called producer surplus (PS). The production of goods and services requires firms to bring all factors of production together and convert inputs to output by taking the risk of production and bringing into the market. Hence, for the firms, the production of goods and services requires bearing costs.

Inflation is the increase in the general price level (or overall level of prices) in the economy within a given period of time. The correct answer is B.

If green tea and black tea are substitutes then the increase in the price of black tea leads to the shift of the demand for green tea to the right; neither left nor down. In this case the demand curve for the black tea does not change. Simply the quantity of black tea demanded decreases.

Price ceiling is a legal maximum on the price at which a good can be sold. The most well-known price ceiling policy is conducted by the rent controls in real life. Price control, on the other handi is a more general term that includes price ceiling and price flooe. The correct answer is C.

For most products, an increase in income leads to an increase in demand. Such goods and services are known as normal goods. As income rises, the demand curve for a normal good will shift up to the right. The exact size of the shift in demand will depend upon the good itself. An increase in income may cause a small shift to the right in the demand curve for salt, but a larger increase in the demand for cinema tickets. A product is said to be inferior if the demand for that product goes down when the income of the consumers increases. Consumers prefer to buy higher priced substitutes in place of the inferior goods when their income rises. Examples of inferior goods may be ordinary (white) bread, cheap cheese (“lor”) or fake brand (imitation) jeans. The correct answer is Choice D.

CONSUMER PREFERENCES

As we mentioned at the outset of this unit, consumer preferences or choices have changed from time-to-time and to understand what accounts for these changes, as well as consumer choice or preferences more generally, it is important to outline several fundamental principles underlying consumer behavior.

We also mentioned that these changes find their reflection through an indifference curve that measures the satisfaction of consumers via utility. Moreover, we, as consumers, have a goal in life, which is to maximize our utility subject to our budget constraint. When we go to the store, we pick the basket that we like best and that stays within our budget. Therefore, this section underlies the basic assumptions that economists make about the nature of the consumer’s tastes or preferences.

1. Preferences are complete: this means that the consumer is able to compare and rank all possible baskets.
2. Consumer’s preferences are transitive.
3. Consumers always prefer more of a commodity to less (i.e., non-satiation).
4. A diminishing marginal rate of substitution (i.e., convexity)

A diminishing marginal rate of substitution is exhibited when indifference curves are convex, and the slope of the indifference curve increases (becomes less negative) as we move down along the curve.

I. The income effect is the change in consumption that results when a price change moves the consumer along an indifference curve to a point with a different marginal rate of substitution. (False, The income effect is the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve. )

II.  The substitution effect is the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve. (False, The substitution effect is the change in consumption that results when a price change moves the consumer along an indifference curve to a point with a different marginal rate of substitution. )

III. The income effect may work in reverse direction for some types of goods known as inferior goods. (True)

The true answer is C.

The law of demand states that there is a negative, or inverse, relationship between the price of a good and the quantity of that good demanded. This inverse relationship indicates that the demand curves slope downward.

The law of demand states that, other things equal, when the price of a good rises, the quantity demanded of that good falls.

The Latin term ceteris paribus describes an assumption which allows for a change in only one variable at a time. In other words, when there is a number of different factors that determine an outcome, we assume that only one can change and all the others are held constant. Thus, in this case, the price is changing while the other determinants of demand are assumed to be unchanging.

Ceteris Paribus is a Latin phrase, which means “other things being equal.” It is used in economics to state that all variables other than the one studied are assumed to be constant or fixed. As it can be understood from the information given the correct answer is “B”.

Supply is more elastic in the long-run than in the short-run. Over the short-run, the firms cannot easily change their plant size or factory size to change their production in response to price changes. However, in the long-run change in the plant size and as a result change in the quantity supplied to price changes are both possible.

Equilibrium is a situation in which the supply and demand equals to each other. The correct answer is Choice A.

Determinants of Demand

The positioning of the demand curve on the Quantity-Price plane is influenced by non-price factors such tastes and preferences, income, prices of related goods, population, seasons and expectations.

Decisions involving only two alternatives are called binary decisions. For example, statements like “buy that shirt or not”; “sell your house or keep it”; “eat meat or go vegetarian” point to binary decisions. Many of our decisions in life are not binary. It can be said that binary decisions are related to Yes/No questions on the other hand the decisions which are not binary may be related to which/why questions. For this reason the correct answer is “A”.

Change in price of a good does not lead to a shift in the demand curve. Quantity demanded of public transportation  fall.

The term marginal is used frequently in economics to refer to small incremental adjustments made on an existing plan of action. The term “margin” means “edge,” so marginal changes are adjustments made to add to the total (the amount at the edge) achieved thus far. For example, for a mother who is feeding her little baby, whether to give an extra spoonful of soup or not is a kind of marginal change. The correct answer is C.

If this airline earns more than the marginal cost, this selling is profitable. Marginal (extra) cost in this situation is only the cost of food and drink that will be offered through the flight. In other words, this airline can be said to have primarily taken into consideration whether it will earn more than the marginal cost or not while making an economical decision. The correct answer is A.