The substitution effect reflects how a consumer will react to a) a different mar

Question

The substitution effect reflects how a consumer will react to
a) a different marginal rate of substitution.
b) a different market rate of substitution.
c) a different level of real income.
d) a different level of nominal income.

If an increase in income causes a decrease in the consumption of good Y we know that good Y is:
a) a normal good.
b) a substitute.
c) a complement.
d) an inferior good.

Which of the following statements is incorrect:
a) Fixed costs do not vary with output.
b) Sunk costs are those costs that are forever lost after they have been paid.
c) Fixed costs are always greater than sunk costs.
d) Fixed costs could be positive when sunk costs are zero.

Explanation / Answer

First one is b) a different market rate of substitution. Second one : d) an inferior good. Third one : c) Fixed costs are always greater than sunk costs.

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