Which of the following describes the substitution effect of a ...

[Kikoku]

Which of the following describes the substitution effect of a price change?
 
  A) The change in quantity demanded of a good that results from the change in the price of a substitute for the good.
  B) The change in demand that results from a change in price, making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.
  C) The change in quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding everything else constant.
  D) The change in quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.

Question 2

Sally quit her job as an auto mechanic earning 50,000 per year to start her own business. To save money she operates her business out of a small building she owns which, until she started her own business, she had rented out for 10,000 per year.
 
  She also invested her 20,000 savings (which earned a market interest rate of 5 per year) in her business. You are given the following information about the first year of her operations.
 
  Total revenue 120,000
  Cost of labor 40,000
  Cost of materials 15,000
  Equipment rental 5,000
 
  a. Calculate her economic costs.
  b. Calculate her accounting costs.
  c. Calculate her implicit costs.
  d. Sally tells you that she would really like to move to a location closer to town but she decided against it because right now I don't pay any rent and it will cost me 10,000 a year to rent near town. Do you agree with her reasoning?

[asware1]

Answer to Question 1

D

Answer to Question 2

a. 121,000 = 40,000 (labor) + 15,000 (materials) + 5,000 (equipment)+ 10,000 (opportunity cost of building) + 1,000 (5 of 20,000, the opportunity cost of her savings) + 50,000 (opportunity cost of Sally's labor)
b. 60,000 = 40,000 (labor) + 15,000 (materials) + 5,000 (equipment)
c. 61,000 = 10,000 (opportunity cost of building) + 1,000 (5 of 20,000, the opportunity cost of her savings) + 50,000 (opportunity cost of Sally's labor)
d. No. Although she does not incur a monetary cost for her garage space now, it is an opportunity cost and part of the economic cost of doing business. Sally could just as well rent her space out now, collect the rent and move closer to town.