Economics Homework Three Answers - Student Thirteen

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Economics Homework Three Leonard G

1.) One example of a good that has a large price elasticity is digital music. When a person goes to purchase a song on iTunes and they find out the price for a song went up ten cents, there is a huge decrease in demand.

Excellent, may use as a model.

2.) Income elasticity is a concept of change in elasticity when a person’s income changes. When a person’s income increases, he is able to buy the higher priced items on the market, such as the latest Mac computer instead of the lower priced Dell computer.

Not "change in elasticity," but "change in demand." Also, note that income elasticity is specific and different for each good. Otherwise your answer is fine. (Minus 1).

3.) A nearly perfect elastic demand curve is almost completely vertical in shape; a nearly perfect inelastic demand curve is almost completely horizontal in shape.

The opposite is true. (Minus 1).

4.) The term “necessity” is given to a good that has a price elasticity of less than one because people need to have this item to help them live. These items will sell at almost any price because they are so important. Some necessities on the market are gas, food, and clean water. The term “luxury” is given to a good that has a price elasticity of more than one because these items are not needed to help us survive. When the price increases on a luxury item, the demand will decrease. Some luxuries on the market are iPods, sports cars, and video games.

Excellent, but note that the demand decreases for both necessities and luxuries, because both comply with the Law of Demand. The demand decreases MORE for elastic goods (luxuries) due to an increase in price. Also, there was a mistake in the question so please see the model answers.

5.) A substitute for french fries is potato chips. A complement for french fries is a soft drink.

Correct.

6.) A normal good is one that has a positive income elasticity; it’s demand increases as income increases. An inferior good is one that has a negative income elasticity; it’s demand decreases as income increases.

Superb. (note: "its", not "it's" in "its demand")

7.) A price ceiling that is set below the equilibrium in a free market price will cause a shortage. This happens because the equilibrium is above the price ceiling, thus forcing the good to be sold at a lower price which in turn causes the quantity of supply to decrease. As you can see on the chart in the lecture, the price ceiling causes the shortage because the quantity supplied is less than the quantity demanded.

Excellent.
69/70. Superb work!--Andy Schlafly 22:02, 27 September 2009 (EDT)