# Assessment Test Short Answer. General comments 1. Demonstrate an understanding of the principles of economics 1. Demonstrate an understanding of the principles.

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General comments 1. Demonstrate an understanding of the principles of economics 1. Demonstrate an understanding of the principles of economics Theory Theory Define terms Define terms Examples Examples 2. Diagrams 2. Diagrams Accuracy! Accuracy! Explain Explain 3. Structure your answer 3. Structure your answer 4. Answer the question! 4. Answer the question!

Example question 1 With one factor fixed, the marginal product of the variable factor will initially rise, but then fall, as more of the variable factor is added due to decreasing returns to scale. With one factor fixed, the marginal product of the variable factor will initially rise, but then fall, as more of the variable factor is added due to decreasing returns to scale. TRUE, FALSE or UNCERTAIN TRUE, FALSE or UNCERTAIN

Answer False False Short run production Short run production Define fixed (K) and variable (L) factors Define fixed (K) and variable (L) factors Define marginal product: Define marginal product: Change in TPP/ Change in L Change in TPP/ Change in L Draw TPP and MPP curves Draw TPP and MPP curves TPP is at a peak when MPP=0 TPP is at a peak when MPP=0 Explain what happens as L increases Explain what happens as L increases

Answer Why does MPP rise and then fall? Why does MPP rise and then fall? Law of diminishing marginal returns Law of diminishing marginal returns Example? Example? Decreasing returns to scale (?) is a long run concept Decreasing returns to scale (?) is a long run concept

Example question 2 For an inferior good, income and substitution effects always move in the same direction. Explain your answer with the aid of an appropriate diagram. For an inferior good, income and substitution effects always move in the same direction. Explain your answer with the aid of an appropriate diagram. TRUE, FALSE or UNCERTAIN TRUE, FALSE or UNCERTAIN

Answer FALSE FALSE Explain your answer using the tools of indifference analysis Explain your answer using the tools of indifference analysis What is an inferior good? What is an inferior good? What are income & substitution effects? What are income & substitution effects? Draw & define indifference curves and budget constraints Draw & define indifference curves and budget constraints Identify the effect of a price increase Identify the effect of a price increase Identify total change in demand Identify total change in demand

Answer Now isolate the substitution effect Now isolate the substitution effect Compensating variation Compensating variation Give the consumer income Give the consumer income Original indifference curve – utility unchanged Original indifference curve – utility unchanged Identify the income effect Identify the income effect Answer: income and substitution effects move in opposite directions Answer: income and substitution effects move in opposite directions

Advice Answer all questions Answer all questions Time management Time management 5 questions in 50 minutes – 10 minutes each 5 questions in 50 minutes – 10 minutes each Remember Remember Diminishing marginal returns to writing! Diminishing marginal returns to writing! Diminishing marginal utility from marking! Diminishing marginal utility from marking! Be succinct! Be succinct!

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