“Lower prices are always good for business.” Evaluate this statement.
What will be an ideal response?
This statement is incorrect. Lower prices are not necessarily good for business. In the long run, the level of prices is irrelevant as wages adjust to compensate for price levels, maintaining workers’ purchasing power and the firms’ profits.
In the short run, lower prices or disinflation reduces firms’ profits, as prices are decreasing faster than wages. This causes firms to decrease production and reduce their payrolls, resulting in unemployment and lower than optimal output. These effects can result in an economic recession in the short run.
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Assuming that the rent ceiling is strictly enforced so that there is no black market, which of the following statements about a housing market with a rent ceiling set below the equilibrium rent is correct?
A) The rent for housing equals the ceiling rent or higher. B) There is excess supply of housing. C) The rent ceiling increases the amount of producers' surplus. D) The rent ceiling creates a deadweight loss. E) The rent ceiling enforces efficiency upon the housing market.
Suppose you go out with your friend for coffee and donuts at the local donut store. The first donut you eat tastes incredibly good. The second one also tastes pretty good. The third donut seems just okay. With the fourth donut you are turning somewhat green. The fifth donut makes you sick. Your friend, an economist, describes your experience as the principle of:
a. utility maximization. b. irrationality in consumer behavior. c. instant gratification. d. differing tastes and preferences. e. diminishing marginal utility.