Question

What does Economics primarily study? Select one: a. how prices are set in the marketplace b. how limited resources are allocated to satisfy unlimited wants c. how we deal with unemployed resources d. how firms compete for profits in the marketplace Which of the following statements best describes scarcity? Select one: a. Even in the wealthiest of countries, the desire for material goods is greater than productive capabilities. b. Scarcity and poverty are basically the same thing. c. The absence of scarcity means that a minimal level of income is provided to all individuals. d. Goods are scarce because of greed.

Answer 1

1. (b) How limited resources are allocated to satisfy unlimited wants.

By definition, economics is the study of allocation of scarce resources such as capital, labour etc to satisfy wants of firms and individuals that are monotonic, i.e. more is always preferred over less. This optimal outcome is achieved by economics as a branch of study.

2. (d) Goods are scarce because of greed.

Scarcity is a relative phenomenon. A loaf of bread may be enough for one person, however, if the person is not satisfied, then there arises scarcity because more is wanted but less is in supply.

3. (d) behavious of firms and households and how they interect in the market.

Microeconomics is a branch of economics that focuses in individual units of the market i.e. few or one household and few or one firm. It examines the market structures like monopoly, oligipoly etc. Macroeconomics on the other hand takes the aggregate of the entire economy.

4. (d) she should never sell something at less than its cost.

(b) i.e. it doesn't matter - looks a convincing argument, but it is not.

If Carol sells without repairing, then she will sell it for $2,000 and she bought it for the same price. Thus, net profit is $0. If she repairs worth $400 and sells it for $2,400 then again her total costs are $2,000 + $400 = $2,400 which is equal to selling price. Again, net profit is $0. However, here she is putting time and effort which could have been utilised elsewhere i.e. opportunity cost. This time and effort has economic value which is foregone and no profit is made. Hence, she should save herself the effort of repairing. (d) is the appropriate option as it is common knowledge that anything sold below the cost price will bring losses which should be avoided.

5. (b) it depends upon the marginal costs of production and marginal revenue from sales.

If cost of producing the addition unit is lesser than the revenue that the seller gains out of that unit, then that production is worthwhile. This should happen until MR and MC are equal. When MC exceeds MR, then that additional unit is bringing losses that should be avoided.

Thanks!