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Chapter 6.1, BEC613067, BEC612066, BEC613085, BEC613306, BEC613313,…
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BEC613067
Luxury good.
Income elasticity of demand measures responsiveness of quantity of product demanded in relation to change in level of income of people demanding that product. If the income elasticity of demand coefficient for a good is 2, it indicates that the demand for good is very sensitive to the change in income levels. This is a characteristic of luxury goods.
Normal good.
Option (c) is incorrect because although it is true that normal goods have positive income elasticity of demand, the demand for normal goods is not as sensitive as luxury goods.
If income elasticity of demand coefficient for a good is 2, the good is:
BEC612066
Product demand increases and product supply decreases. Which of the following statements are correct regarding resulting market changes?
The effect of shifts in demand and supply when product demand increases and product supply decreases is such that, the price of the product increases and quantity demanded is indeterminate (uncertain).
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BEC614243
A consumer saves $500 every month and spends $3,500 based on an income of $4,000. With a recent increase in personal income by $600 and taxes by $100 per month, is spending $200 more than before. What is the consumer’s marginal propensity to consume (MPC)?
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New savings = New personal disposable income - New consumption = ($4,000 + $600 - $100) - ($3,500 + $200) = $800.
Now, change in consumption = $200 (given).
Thus, marginal propensity to consume = $200 / $500 = 0.4.
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BEC610538
The full-employment gross domestic product is $1.3 trillion, and the actual gross domestic product is $1.2 trillion. The marginal propensity to consume is 0.8. When inflation is ignored, what increase in government expenditures is necessary to produce full employment?
The question is asking us to determine the amount of government spending to produce full employment. In order to achieve full employment, the country needs an additional $100 billion ($1.3 trillion full employment GDP - $1.2 trillion actual GDP) in GDP. The increase in government spending can be arrived from MPC and MPS. Marginal propensity to consumer (MPC) is the percentage of the next dollar of income that the consumer would be expected to spend. Marginal propensity to save (MPS) is the proportion of each additional dollar of household income that is used or saving. It is calculated as below:
MPC = Change in consumption/Change in disposable income.
Given MPC = 0.8, then marginal propensity to save (MPS) is 1-MPC. i.e. 1-0.8 = 0.2.
Therefore, increase in government expenditures necessary to produce full employment= Increase in GDP MPS = $100 0.2.
Increase in government expenditures = $20 billion.
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