1. What is the difference between a normal good and an inferior good? How does the income elasticity of

demand measure this difference?

A normal good is a good whose demand increases as income increases, while an inferior good is a good

whose demand decreases as income increases. The income elasticity of demand is the percentage change in

quantity demanded divided by the percentage change in income. It measures how responsive the demand for

a good is to changes in income. A normal good has a positive income elasticity of demand, while an inferior

good has a negative income elasticity of demand.

2. What are the three types of market structures? What are the main characteristics and examples of each

type?

The three types of market structures are perfect competition, monopoly, and imperfect competition. Perfect

competition is a market structure where there are many buyers and sellers, the products are homogeneous,

there is free entry and exit, and there is perfect information. Examples of perfect competition are agricultural

markets, foreign exchange markets, and stock markets. Monopoly is a market structure where there is only

one seller, the product has no close substitutes, there are high barriers to entry, and there is imperfect

information. Examples of monopoly are public utilities, natural resources, and patents. Imperfect

competition is a market structure where there are few buyers and sellers, the products are differentiated,

there are some barriers to entry, and there is imperfect information. Examples of imperfect competition are

oligopoly and monopolistic competition.

3. What is the law of diminishing marginal utility? How does it explain the downward-sloping demand

curve?

The law of diminishing marginal utility states that as a consumer consumes more units of a good, the

additional satisfaction or utility from each additional unit decreases. This implies that the consumer is

willing to pay less for each additional unit of the good. Therefore, the demand curve slopes downward,

reflecting the inverse relationship between price and quantity demanded.

4. What is the difference between explicit costs and implicit costs? How do they affect economic profit and

accounting profit?

Explicit costs are the direct monetary payments made by a firm to acquire or use resources, such as wages,

rent, interest, and materials. Implicit costs are the opportunity costs of using the firm's own resources or

those provided by its owners, such as forgone salary, rent, interest, and profit. Economic profit is the

difference between total revenue and total cost, where total cost includes both explicit and implicit costs.

Accounting profit is the difference between total revenue and explicit costs only. Therefore, economic profit

is always less than or equal to accounting profit.