I.  The marginal rate of substitution is the maximum amount of another good that a person is willing to give up to obtain one additional unit of the good. (True)

II. Two goods are perfect complements when the marginal rate of substitution of one good for the other is constant. (False, two goods are perfect substitutes when the marginal rate of substitution of one good for the other is constant.)

III. Two goods with right-angle indifference curves are perfect substitutes such as left and right shoes. (False, two goods with right-angle indifference curves are perfect complements such as left and right shoes.) 

The answer is A.

The law of diminishing marginal utility is that the marginal (or additional) utility derived from consuming successive units of a product will eventually decline as the rate of consumption increases. The answer is D.

The answer of this question is related to the price elasticity of demand. If demand is elastic, an increase in price causes total revenue to decrease. A decrease in price, in contrast, causes total revenue to increase. On the other hand, when demand is inelastic, an increase in price causes total revenue to increase. With an inelastic demand curve, the reason that total revenue increases with price increase since the increase in price leads to a decrease in quantity demanded that is proportionally smaller. The correct answer is E.

Determinants of Price Elasticity of Demand

The price elasticity of demand for a good or service depends on many factors such as whether close substitutes are available, the good is necessity of luxury for the consumer, share (weight) of the good’s cost in the consumers’ budget, and the time period.

If production technique A allows for production of more goods than technique B without increasing the amount of inputs and energy used, for example, technique A is said to be more efficient than technique B. For this reason the correct answer is “A”.

Inelastic demand always takes a value between zero and -1.Elastic demand has an
absolute value greater than 1. Demand is inelastic when the percentage change in quantity demanded is smaller than the percentage change in price. Demand is elastic when the percentage change (decrease) in quantity demanded is larger than the percentage change
(increase) in price. Answer is B.

Shape of Demand Curves and Elasticity

The price elasticity of demand is closely related to the slope of the demand curve but the slope of a demand curve is different from its price elasticity of demand. However, there are exceptions in which the price elasticity of demand can be understood by looking at the slope of the demand curve. These cases are: (i) when price and quantity are identical, by looking at the slopes of the two intersecting demand curves it can be said which one is more elastic than the other. (ii) If the demand curve is vertical, its slope and its price elasticity is zero, and (iii) If the demand curve is horizontal, its slope and the price elasticity would be infinite.

Demand and Demand Curve

Demand curves are downward sloping to reflect the negative relationship between the price and quantity demanded. Moreover, they are normally convex to the origin. However, economists usually draw them as straight lines. It is ironic that these lines are still called curves, but we will follow the same convention and call them demand curves whether they are really curves or are lines.

Any point that is located above and to the right of an indifference curve provides a higher level of consumption of each good than the points on that indifference curve. Because of this, point V provides a higher level of utility than the points on the indifference curve. Thus, point V would be preferred to either point II, III or IV. The point that lies below and to the left of the indifference curve (point I), however, provides a lower level of utility. The correct answer is E.

Let’s consider the budget constraint facing an
individual who has a fixed level of income (I) that
can be used to buy two goods (X and Y) at fixed
prices (PX and Py). The budget constraint facing
this individual can be expressed as:
Px.X + Py.Y = I 

The answer is B.

There are two types of markets: product markets and factor markets. In product markets, all sorts of goods and services from cars to movie tickets are bought and sold. They refer to the market for the final goods themselves; however, factor markets are concerned with markets for factors of production or input in a production process, such as land, labor and capital. When you are offered a consumer loan, you are in a capital market. When you try to get a job, you are in a labor market. If you want to buy a piece of land or house by the Aegean coast for your retirement, then you are a participant in the land market or real estate market. The correct answer is A.

The fundamental principles of consumer behavior are limited income necessitates choice, consumers make their decisions purposefully, one good can be substituted for another, consumers must make decisions without perfect information but knowledge and past experiences will help, the law of diminishing marginal utility applies. The true answer is D. 

Inequity is not a couse of market failure

Consumers differ in the importance that they attach to an extra unit of a particular good. This is useful in getting a measure of the relative importance attached by the consumer to the acquisition of another unit of a particular good. This means that whereas a consumer’s consumption of good X increases (and his or her consumption of good Y declines), his or her valuation of good X relative to good Y will decline. Besides, MRS is defined as the number of units of good Y that must be given up if the consumer, after receiving an extra unit of good X, is to maintain a constant level of satisfaction or utility. 

The concept of equilibrium is central in economics. Equilibrium can be defined as a situation in which the supply and demand equals to each other. In other words, it is the price level at which demand and supply curves intersect. At this price level, the quantity demanded will be equal to the quantity supplied. The correct answer is C.

As a social policy, the minimum wage laws are imposed to create a fair minimum wage floor to protect workers in the job market. While the intention of the policymakers is to protect the workers, the imposition of minimum wage laws creates unemployment for especially unskilled labors. Price floor is a legal minimum on the price at which a good or service can be sold.

A demand curve is a graph that illustrates how much of a specific good an individual or household would be willing to buy at different prices. The answer is A.

Eating one more meatball at dinner (increasing the total number of meatballs eaten from 3 to 4).That last meatball is called marginal as they are additions at the edge. The answer is A.

Necessities, such as food, clothing, health services and gasoline tend to have small income elasticities since consumers, regardless of their income levels, chose to buy these items. Luxuries on the other hand tend to have large income elasticities. The correct answer is C.