Scenario 8.1: Ana used to work for a Advertising agency where she earned a yearl

Question

Scenario 8.1: Ana used to work for a Advertising agency where she earned a yearly salary of $60,000. She got tired of
working for another company so she opened his own Advertising company. Ana now pays her designer $40,000 per year
and spends $25,000 for rent and utilities. She earns $120,000 in annual revenue.
30) Refer to Scenario 8.1. What is Ana's explicit cost? 30) ______
A) $65,000 B) $35,000 C) $45,000 D) $55,000

31) When a decrease in the price for wine increases Adam's real income, Adam will buy more of all normal goods. If wine
is a normal good, then Adam will buy more wine due to: 31) ______
A) law of supply. B) law of demand.
C) substitution effect. D) income effect.

32) Which of the following is a reason why wage rates may differ among workers? 32) ______
A) differences in skills required B) racial and gender discrimination
C) differences in working conditions D) all of the above

33) Brandon eats four tacos a on a Sunday night but admits each slice of pizza doesn't taste as delicious as the previous
one. This suggests that for Brandon: 33) ______
A) the total utility of slice of pizza is declining by larger and larger increments.
B) the total utility of slice of pizza is increasing by larger and larger increments.
C) the marginal utility of a slice of pizza is positive but decreasing.
D) the marginal utility of a slice of pizza is negative but increasing.

34) The demand for a product of a monopolistically competitive firm is: 34) ______
A) unit elastic. B) price inelastic. C) price elastic. D) undefined.

35) A single firm selling its output in a contestable market will: 35) ______
A) be able to maintain high prices indefinitely.
B) be able to earn high economic profits indefinitely.
C) be threatened constantly the entry of new firms.
D) establish a monopoly.

Explanation / Answer

A) $65,000. (Explicit cost doesn't include opportunity cost)

B) law of demand. (Law of demand states that all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa.)

D) all of the above

C) the marginal utility of a slice of pizza is positive but decreasing (he is deriving utility from each slice as he continues to eat, but the marginal utility is decreasing as each slice is less satisfying than the previous)

C) price elastic (It is a characteristic of monopolistic competitive market)

C) be threatened constantly the entry of new firms. (Contestable markets are characterized by "hit and run" competition; if a firm in a contestable market raises its prices much beyond the averageprice level of the market, and thus begins to earn excess profits, potential rivals will enter the market, hoping to exploit the price level for easy profit. When the original incumbent firm(s) respond by returning prices to levels consistent with normal profits, the new firms will exit. Because of this, even a single-firm market can show highly competitive behavior.)

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