Economics Answer Note #37

Question 1 All things being equal, Average Propensity to Consume is always ___________________ Marginal Propensity to Consume Question 8Answer a. Equal to b. Has no relationship with c. Less than d. Greater than Answer Greater than There are several factors that determine the relationship between Average Propensity to Consume (APC) and Marginal Propensity to Consume (MPC). However, all things being equal, APC is always greater than MPC. APC measures the average percentage of income that is consumed, while MPC measures the change in consumption for a given change in income. In other words, APC is the total consumption divided by total income, while MPC is the change in consumption divided by the change in income. To understand why APC is always greater than MPC, we must first understand the concept of diminishing marginal utility. This concept states that as a consumer's income increases, the satisfaction or utility derived from each additional unit of consumption decreases. This means that as income increases, the marginal propensity to consume decreases, resulting in a lower MPC. On the other hand, APC is calculated by dividing total consumption by total income. Since total consumption includes all levels of income, it is affected by both high and low levels of marginal propensity to consume. Therefore, as income increases, APC also decreases, but at a slower rate compared to MPC due to the inclusion of lower MPC levels. Mathematically, we can see this relationship by considering the formula for APC and MPC: APC = C / Y, where C represents consumption and Y represents income. MPC = ∆C / ∆Y, where ∆C represents change in consumption and ∆Y represents change in income. We can see that as income (Y) increases, APC decreases at a slower rate compared to MPC due to the division by a larger income. This means that APC is always greater than MPC. In conclusion, all things being equal, APC is always greater than MPC due to the concept of diminishing marginal utility. This relationship is important in understanding consumer behavior and its impact on the economy. Question 2 In inflation, employment and outpput model, AS0 curve means_____ Question 8Answer a. supply curve b. final aggregate supply c. aggregate supply d. Initial aggregate supply Answer In the inflation, employment, and output model, the AS0 curve represents the initial aggregate supply. This curve shows the relationship between the price level and the overall supply level of goods and services in an economy at the beginning of a period, without taking into account changes in input prices. It is also known as the short-run aggregate supply curve. To understand this concept better, it is important to first define and understand the terms "inflation", "employment", and "output" in the context of this model. Inflation refers to the sustained increase in the overall price level of goods and services in an economy over a period of time. Employment, on the other hand, refers to the level of job opportunities available in an economy and can be measured through the unemployment rate. Lastly, output is the total production of goods and services in an economy. Now, let us take a closer look at the AS0 curve and its relevance in the inflation, employment, and output model. The curve is upward sloping, indicating a positive relationship between the price level and the quantity of goods and services supplied. This means that as the price level increases, the quantity supplied also increases. This is due to the concept of the price of a good or service, which states that producers are willing to supply a higher quantity of their products at higher prices, as it increases their profitability. The AS0 curve is drawn based on the assumption of constant input prices. This means that the input prices, such as labor and raw materials, remain the same while the price level changes. This is why it is also referred to as the short-run aggregate supply curve, as it only shows the relationship in the short run, before input prices adjust to changes in the price level. Moreover, it is important to note that the AS0 curve does not take into account the effects of changes in demand. In the long run, as prices adjust and input prices change, the AS0 curve will shift to a new position, represented by the AS1 curve. This shows how changes in input prices can impact the overall supply level in the long run. In conclusion, the AS0 curve represents the initial aggregate supply and shows the relationship between the price level and the overall supply of goods and services in an economy, without taking into account changes in input prices. It is a vital component in the inflation, employment, and output model and can provide valuable insights into the short-run dynamics of an economy. Question 3 Efficiency condition in perfectly competitive market require that the trade-off between any two goods must _____ for all economic agents Question 9Answer a. not be equal b. be varied c. be unstable d. be equal Answer The efficiency condition in a perfectly competitive market refers to the allocation of resources that leads to the maximum production of goods and services with the given inputs. It is a critical aspect of economics as it ensures that resources are allocated in an optimal manner, leading to overall economic welfare. In order for a market to be considered perfectly competitive, there must be a well-defined set of rules that govern the behavior of both buyers and sellers. One of these rules is the trade-off between any two goods. The correct answer to the question is d. be equal. In a perfectly competitive market, this is known as the principle of equal marginal rates of substitution. This principle states that the marginal rate of substitution between any two goods must be equal among all economic agents. In simpler terms, the trade-off between any two goods must be the same for all buyers and sellers. In a perfectly competitive market, all firms produce identical products, and there is perfect information, meaning that all firms and consumers have access to the same information. Therefore, in order to remain competitive, prices must be set at a level where the marginal rate of substitution for all buyers is equal. Question 4 Another programme used in the improvement of income inequality is ______ Question 1Answer a. homogenity of income b. Tax-Subsidy c. straighten Lorenz curve d. income substitution Answer Another programme used in the improvement of income inequality is Tax-Subsidy. This programme aims to reduce income inequality by providing financial support to individuals or households with lower incomes, while also imposing higher taxes on those with higher incomes. This form of redistribution can help to equalize income levels and reduce the gap between the rich and the poor in society. Tax-Subsidy is a policy that has been widely studied and implemented in various countries around the world. According to a study by the International Monetary Fund (IMF), implementing progressive tax policies can significantly reduce income inequality and promote economic growth (Ostry et al., 2014). In addition, the Organisation for Economic Co-operation and Development (OECD) has also highlighted the effectiveness of tax policies in reducing income inequality (OECD, 2014). One of the key mechanisms of Tax-Subsidy is the use of tax brackets, where individuals with higher incomes are subject to a higher tax rate than those with lower incomes. By doing so, the government can generate more revenue from those who can afford to pay higher taxes, which can then be used to provide subsidies to individuals or households with lower incomes. This helps to reduce income inequality and promote a more equitable distribution of wealth. Another important aspect of Tax-Subsidy is the provision of social benefits or subsidies, such as unemployment benefits, housing assistance, and healthcare subsidies. These benefits are targeted towards those with low incomes, to help alleviate their financial burden and improve their overall well-being. This can also have a positive impact on reducing income inequality. It is worth noting that the effectiveness of Tax-Subsidy in reducing income inequality can be affected by various factors, such as the design of the tax system, the level of government spending on social benefits, and the overall economic growth of the country. Therefore, it is important for policymakers to carefully consider these factors when implementing Tax-Subsidy programmes. In conclusion, Tax-Subsidy is a crucial programme in addressing income inequality and promoting a more equal distribution of wealth. It has been extensively studied and implemented in many countries, and its effectiveness has been proven by various international organizations. By utilizing progressive tax policies and providing social benefits to low-income individuals, Tax-Subsidy has the potential to significantly reduce income inequality and promote a more equitable society. Question 5 Owing to its nature as good that does not deprives, its provision in societies is majorly ______ financing Question 7Answer a. borrowing b. grants c. taxation d. individual\'s support Answer The provision of goods that do not deprive individuals in society can be financed through various means. However, the most common and effective method is through taxation. Taxation allows for a stable and continuous source of funds that can be used to provide these essential goods to the population without depriving anyone. According to the traditional economic concept of the "free rider problem", individuals will often try to benefit from public goods without contributing towards their provision. This can lead to underprovision of necessary goods in society. Therefore, taxation is a crucial source of financing for these goods as it ensures that all members of society contribute towards their provision. In addition, taxation is also able to generate a significant amount of funds for the government, which can then be allocated towards the provision of public goods. Through progressive taxation methods, individuals with higher incomes are able to contribute more towards the provision of these goods, ensuring that they are accessible to all members of society regardless of their financial status. Moreover, taxation can also be used as a tool for redistribution of income in society. By taxing individuals with higher incomes at a higher rate, the government can generate additional revenue that can be used to provide essential goods to those in need.