# BUS 475 Economics Topics Answer Guide | June 2017

### Hailey’s Food Inc. sells fish sticks at \$3.00 a box

Hailey’s Food Inc. sells fish sticks at \$3.00 a box. The government passes a law requiring sellers of food products to pay \$0.50 as tax for each product they sell. Hailey’s has to pay the government \$0.50 for every box of fish sticks it sells. The company decides to trade down to compensate for the tax. Which of the following is a likely outcome of the company’s decision?

• The company will increase the price and quantity of fish sticks,
• The company will continue to sell the same quantity of fish sticks at the same price.
• The company will sell fish sticks worth \$2.50 at \$3.00 per box.
• The company will increase the price of one box of fish sticks to \$3.50 while also increasing the package size

Explanation: When a company “trades down”, it is selling one item to buy something less expensive. In this case, the company is likely to sell a less valuable product at a higher price to compensate for the tax.

### A shift in the demand curve for pretzels increases the price of pretzels from \$1.25 to \$1.75 and its quantity demanded from 30 million to 35million. The price elasticity of demand for pretzels is ____.

• 5 million pretzels per dollar
• 2.34.
• 0.46
• \$1.50 per pretzels

Explanation: Solution = Change in Quantity % / Change in Price % or 0.4 / 0.1666

### Sophie owns SugarCream bakery that produces 20 pastries in a day

Sophie owns SugarCream bakery that produces 20 pastries in a day. The price of one pastry is \$12. If she hires another worker, she will be able to produce 24 pastries in a day. Assuming that she operates in a competitive market and aims to maximize her profits, she decides not to hire the additional worker. Which of the following explains why Sophie did not hire the additional worker?

• The cost of hiring the additional worker was greater than the value of producing additional pastries.
• The cost of hiring the additional worker was less than the marginal product of the additional worker.
• The opportunity cost of hiring the additional worker was zero.
• The cost of hiring the additional worker was less than the average product of the additional worker.

### Colneith Corp. is a pharmaceutical firm that mainly produces drugs for Alzheimer’s disease.

Colneith Corp. is a pharmaceutical firm that mainly produces drugs for Alzheimer’s disease. The Medical Association of Zachary Islands conducted a study on the effectiveness of the firm’s drugs and found that multiple dosages of drugs were fatal. This discovery would most likely lead to:

• a decline in the production of the drug.
• short-run profits for the firm
• the exit of the firm from the market
• an increase the production of the drug

Explanation: These findings would force the company to scale back production of this drug, but not cause them to leave the market completely.

• Student: Dimitri Bush
• Textbook: Variety
• Course: BUS 475 – 2017/18