Which of the following offers the fullest explanation of why price equals marginal cost is the rule from marginal analysis that indicates the profit-maximizing output level?
a. If output were reduced from the profit-maximizing level, then the firm would be giving up marginal revenue that exceeds marginal cost, and thus reducing the level of profit.
b. If output were increased from the profit-maximizing level, then the firm would be gaining marginal revenue that is less than the marginal cost incurred in producing this additional unit, and thus reducing the level of profit.
c. Because the firm colludes with other similar firms to set price equal to marginal cost.
d. Both a. and b. above are correct.
Question 2
The income elasticity of demand for shoes is estimated to be 1.50 . We can conclude that shoes:
a. have a relatively steep demand curve.
b. have a relatively flat demand curve
c. are a normal good.
d. are an inferior good.
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