Suppose an individual consumes just pizza and soda. Using a graph, explain how the substitution bias causes the Lespeyres price index to overstate the true change in the cost of living resulting from an increase in the price of pizza.
What will be an ideal response?
See Figure 6.9. The consumer originally consumes at the point labeled "Best Choice in the Current Period". An increase in the price of pizza will cause the budget line to rotate to a new position labeled "Current-Period Budget Line". If we assume real income remains constant, then the consumer can still afford the original combination of pizza and soda. That implies that the current-period budget line passes through the best choice combination in the base period. However, the consumer can move to a higher indifference curve by choosing the combination labeled "Best Choice in Current Period". The consumer achieves this higher level of utility by substituting soda in place of the relatively more expensive pizza.
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The law of diminishing marginal returns states:
a) As a firm uses more of a variable factor of production, with a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes. b) As a firm uses more of a variable factor or production, total product eventually decreases. c) As the size of a firm?s plant increases, average cost eventually decreases. d) As the size of a plant increases, marginal product eventually decreases. e) As a firm uses more of a variable factor of production, its average cost eventually decreases.
In some cases, firms that are accused of antitrust violations by federal authorities will plead guilty to the criminal charges in order to avoid facing the same charges in a private or civil trial. Why?
A) Attorneys in civil cases tend to be more effective at proving their claims. B) The penalties for a conviction in a civil or private case are treble damages, or three times larger than the penalties in a criminal or public case. C) Judges in criminal cases are known to be more lenient. D) none of the above