True, False, or Uncertain [48 marks - 6 marks each] Explain why each of the foll

Question

True, False, or Uncertain [48 marks - 6 marks each] Explain why each of the following statements is True, False, or Uncertain according to economic principles. Use diagrams where appropriate. Unsupported answers will receive no marks. It i s the explanation that is important.

A3 - 1. Assuming that all endowment income is earned in the present then, i f a household considers both present and future consumption to be normal goods, an increase in income earned in the present causes the household t o increase its saving.

A3 - 2. Suppose that o ver the last few years s everal monetary jurisdictions worldwide have had negative after - tax real interest rates. Faced with this, households who earn all of their e ndowment income in the present would reduce their saving to zero.

A3 - 3. Suppose the output of a firm changes from 1000 to 1400 to 1700 as the firm changes from 10 to 11 to 12 workers. The firm experiences diminishing marginal product over this range of labour input.

A3 - 4 . Two Econ profs quit their jobs to launch U&I Consulting. If the firm generates $ 3 50,000/year in revenue , and pays $ 2 00,000/year in rent , interest on a bank loan, and to employ a research assistant, t he venture earns positive accounting and economic pro fit.

Explanation / Answer

A3, 1) False.

because, the income effect of normal good is positive . or normal good has a positive relationship with income and quantity demanded. thus when the income increases, quantity demanded also increase, thus consumption increase and saving fall.

2) TRUE.

3) TRUE

Yes, the firm is experience diminishing marginal product of labor input, because , when firm is hiring more labor, its marginal product of labor is decreasing. that when the firm labor is 10, MPL is 1000 and when labor increase to 11 , MPL goes to 400 and when labor is increased to 12 , the MPL diminished to 300. therefore, MPL is diminishing.

4) TRUE

yes, the venture earns positive economic profit. because thier total revenue = $3,50,000

and tc = $2,00,000

so profits = 350000 -200000 = 150000

so, firms earns a economic profit of $150000

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