Author Question: Using the figure above, suppose with no trade Liz and Joe each produce at point A on their ... (Read 29 times)

anjilletteb · **on:** Jun 29, 2018

Using the figure above, suppose with no trade Liz and Joe each produce at point A on their respective PPFs. Then, Joe suggests that they specialize and trade. He would produce only salads and Liz would produce only smoothies.

Then, Joe says, he would buy 16 smoothies from Liz at a price of 1.5 salads per smoothie. Liz should
A) not accept Joe's offer since she would lose 2 smoothies and 2 salads.
B) accept Joe's offer, as she will be as well off as with no trade.
C) accept Joe's offer since she will gain 4 smoothies and 4 salads.
D) accept Joe's offer since she will gain 4 salads.
E) not accept Joe's offer, as the price he offers is too low for her to gain from trade.

Question 2

List and explain factors that influence consumption expenditure.

What will be an ideal response?

T4T · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

C

Answer to Question 2

Disposable income is an important factor that influences consumption expenditure. There is a direct relationship between the two, so that an increase in disposable income leads to an increase in consumption expenditure. There also are three other factors that influence consumption expenditure: the real interest rate, wealth, and expected future disposable income. When the real interest rate falls, wealth increases, or expected future disposable income increases, consumption increases. Alternatively, when the real interest rate rises, wealth decreases, or expected future income decreases, consumption expenditure decreases.