A question on an economics exam asks, "What happens in the market for jelly when the price of peanut butter increases?" Allison, an excellent student, shows the demand for jelly increasing. Is she necessarily wrong? Why or why not?
If we consider Allison's answer wrong, we are implicitly assuming that peanut butter and jelly are complements and that the demand for jelly should decrease. But suppose Allison eats peanut butter sandwiches, or she eats jelly sandwiches (tastes are subjective); in this case, she views the goods as substitutes, and her answer is correct. Good exam writers need to make explicit what they want students to assume.
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Which of the following is an example of search costs?
A) Isabel knows that other neighbors' sleep patterns must also be affected by the howling dogs in her neighborhood and sets out to find those neighbors. B) Isabel is bound and determined to to find out which of her neighbors owns the howling dogs that are preventing her from getting a full night's slee
How would each of the following events affect the level of employment and the real wage rate?
(a) A tremendous boom occurs in the stock market, increasing people's wealth by $100 billion overnight. (b) A major government loan-guarantee program goes bust, losing $500 billion. To pay off the loss, the government announces that tax rates will rise 30% in the future. (c) A nuclear mishap contaminates all auto plants in the Detroit area, destroying their capital. (d) Medical science cures the common cold, causing fewer work days lost due to illness, thus greatly increasing labor productivity.