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Study Questions for Final Exam

Business Administration
Course Code
BUS 207
Allan Matadeen
Study Guide

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Assess the validity of the following: If true, mark true; if false, explain why the statement is false.
(1) So long as the demand for cigarettes is not perfectly inelastic, an increase in price leads to a
decrease in demand.
(2) At his constrained utility-maximum, Paul buys a positive amount of an inferior good (X) and a
luxury good (Y); at this equilibrium MUX/PX must be less than MUY/PY.
(3) A 3 % increase in the price of widgets causes a 6 % increase in the demand for woozles. The two
goods are substitutes since the cross elasticity of demand for woozles with respect to the price of widgets
is +0.5.
(4) The law of diminishing marginal utility means that as one consumes more of a given commodity
his or her satisfaction from doing so diminishes.
(5) An increase in discretionary income (income after ALL bills have been taken care of) increases
the quantity demanded of luxury goods.
(6) The demand for Clearasil cream is linear. At a sufficiently high price, the sale of Clearasil cream
would be completely cut off and not even Seignior Manuel Noriega would buy. At this price, the
elasticity of demand for Clearasil cream becomes zero.
(7) If the Total Product of labor is linear, Average and Marginal Product of labor are equal at all
(8) An increase in disposable income decreases the quantity demanded of inferior goods.
(9) Constant elasticity demand curves imply that expenditure (or revenue) always stay the same.
(10) Marginal Revenue is positive as long as Total Revenue is also positive.
(11) If in a model with only two goods the MRSX, Y is constant and greater than the price ratio PX/PY,
the consumer buys no X.
(12) In stage I of the production process, Total Product always increases at an increasing rate.
(13) The substitution effect shows that a fall in the price of a good leads to an increase in the demand
for that good and vice versa.
(14) Inferior goods are goods that we buy more of at lower income levels; they are characterized by
rapidly falling marginal utility
(15) Whenever prices are positive, the individual maximizes utility where MUx/Px = MUy/Py and all
income is spent. Therefore, the individual will buy equal amounts of X and Y whenever Px = Py.
(16) In stage I, Total Product increases at an increasing rate and in stage II, Total Product increases at
a decreasing rate as more labor is hired.
(17) Whenever demand is inelastic a decrease in price will decrease both the quantity sold and the
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