Category: Economics

Question 38If consumers have an expectation of higher future prices, the supply of the good that is currently available:
will decrease.
will increase.
will not change.
will be all that is produced.

➤ What does Keynesian fiscal policy recommend during recessions?
Keynesian policy recommends raising public spending and lowering taxes in recessions to boost aggregate demand. Governments may accept temporary deficits to fund infrastructure, benefits, and demand-supporting programs. The aim is to restore output and employment until private demand recovers, then gradually remove stimulus during expansion.

Suppose a hospital performs bypass surgery. An advacement in technology allows it to perform the surgery at a lower cost. The demand-supply framework predicts the hostpial will respond by what?

➤ Why do we use the derivative to find marginal cost?
We use the derivative because it gives the instantaneous rate of change of total cost with respect to output. That rate measures the cost of a very small increase in production. It helps locate efficient output and profit-maximizing points where marginal cost equals marginal revenue, offering greater precision than average changes.

Opportunity costs:involve monetary rather than non-monetary costs.decrease as individuals become wealthier.influence all economic decisions.are generally the same from individual to individual.

➤ How does entry and exit affect long-run profits in monopolistic competition?
Free entry and exit cause profits to vanish in the long run. When firms earn short-run profits, new rivals enter, shifting demand for incumbents left and reducing prices. This process continues until firms earn zero economic profit, where price equals average total cost at the firm’s chosen output but not necessarily at minimum average cost.

3. How does comparative advantage drive specialization?
Comparative advantage means producing goods at a lower opportunity cost than others. Specialization follows when individuals focus on activities where they hold this advantage. By trading, each person can consume more than they could alone. Comparative advantage thus underpins efficient allocation, gains from trade, and higher aggregate welfare.