Introduction to Economics (Past Paper) Essay Example | Topics and Well Written Essays - 3000 words

Introduction to Economics (Past Paper) - Essay Example TRUE: If a country has the competitive advantage of producing a good, then it should use the same advantage to produce the same and export (Lipsey & Chrystal, 2007). Importing commodities that a country can produce more cheaply will only lead to trade deficits, hence a bad economic policy. TRUE: Demand curve for an inferior good must be upwards-sloping due to the fact that the income and substitution effects work in different directions. Whereas a decrease in price of an inferior good causes more consumption via the substitution effect, the same is likely to cause less consumption given the income effect (Lipsey & Chrystal, 2007). In the below figure, X is a inferior good while Y is a normal good given the reduction and increase in demand respectively due to increases in income (income substitution). TRUE: Marginal cost (MC) is the additional cost incurred in producing one more unit hence; it changes with changes in the quantity produced. In a scenario where the marginal cost is increasing, the average total cost (ATC) curve is likely to be U-shaped (Lipsey & Chrystal, 2007). MC is factored within ATC and as quantity increases; the ATC and MC will decrease and increase respectively. MC will continue to increase thereby pulling up the ATC hence the marginal cost crosses average cost at a point where average cost is increasing as illustrated below. FALSE: Diseconomies of scale occur in an organization when expansion of all available inputs such as labour and capital causes an increase in the long-run average cost (Lipsey & Chrystal, 2007). On the other hand, diminishing marginal return refers to an economic scenario where marginal product continues to diminish despite addition of one input and holding the other inputs constant (Lipsey & Chrystal, 2007). Therefore, diseconomies of scale is not related to diminishing marginal returns since the latter only