Bcom Bachelor of Commerce Bachelor of Commerce: Economics 3 — Questions and Answers
Question 1: If the cross-price elasticity of demand between two goods is negative, the goods are:
- Substitutes
- Normal goods
- Complements (Correct answer)
- Inferior goods
Correct answer: Complements
A negative cross-price elasticity means demand for one good falls when the price of the other rises, indicating the goods are used together (complements).
Question 2: The long-run aggregate supply (LRAS) curve is vertical because:
- Prices are sticky in the long run
- The economy always operates at full employment in the long run (Correct answer)
- Investment determines output, not prices
- Monetary policy is ineffective in the long run
Correct answer: The economy always operates at full employment in the long run
In the long run, all prices adjust fully, so the economy returns to its natural (full employment) level of output regardless of the price level.
Question 3: Which theory of international trade argues that countries should export goods they can produce at a lower opportunity cost than their trading partners?
- Absolute advantage theory
- Comparative advantage theory (Correct answer)
- Heckscher-Ohlin theory
- New trade theory
Correct answer: Comparative advantage theory
Comparative advantage, developed by David Ricardo, says trade should be based on relative opportunity costs, not absolute productivity.
Question 4: In a perfectly competitive market in long-run equilibrium, economic profit equals:
- Normal profit
- Zero
- A positive amount determined by demand
- Both A and B (Correct answer)
Correct answer: Both A and B
In long-run perfect competition, entry eliminates economic profit, leaving firms earning exactly zero economic profit, which equals normal (accounting) profit.
Question 5: The Phillips Curve illustrates a short-run trade-off between:
- Inflation and unemployment (Correct answer)
- GDP growth and the trade deficit
- Interest rates and investment
- Money supply and the price level
Correct answer: Inflation and unemployment
The original Phillips Curve shows that lower unemployment is historically associated with higher inflation in the short run.
Question 6: When a central bank sells government securities in the open market, the money supply:
- Increases because banks receive funds
- Decreases because banks pay for the securities, reducing reserves (Correct answer)
- Remains unchanged because the transaction is internal
- Increases because government spending rises
Correct answer: Decreases because banks pay for the securities, reducing reserves
Open market sales remove reserves from the banking system, contracting the money supply.
Question 7: Consumer surplus is defined as:
- The amount a consumer spends minus their income
- The difference between the maximum a consumer is willing to pay and the price they actually pay (Correct answer)
- Total utility divided by total expenditure
- The area below the supply curve and above the equilibrium price
Correct answer: The difference between the maximum a consumer is willing to pay and the price they actually pay
Consumer surplus measures the net benefit consumers receive by paying less than their reservation price.
Bcom Bachelor of Commerce Bachelor of Commerce: Economics 3
If the cross-price elasticity of demand between two goods is negative, the goods are: