# Economics Homework Three Answers - Student Twenty-One

Michelle F

1. Give an example of a good that has a large price elasticity, meaning that a small decrease in price causes a big increase in demand.

Cars. Other less expensive methods of transportation are available, so if the price increases, sales go down. Or people come up with alternatives to buying a car. Like using a Zipcar instead.

Excellent. I see the Zipcar around but I haven't figured out what it is yet!

2. Explain the concept of income elasticity.

Income elasticity is the percent change in quantity sold divided by the percent change in income. For a "normal" good, when the average income increases, the demand for the good increases as well. There are some "inferior" goods that the demand decreases for when the average income increases.

Superb, model answer quality.

3. A nearly perfectly elastic demand curve is nearly ________ in shape; a nearly perfectly inelastic demand curve is nearly __________ in shape.

Horizontal, vertical.

Correct.

4. Why is the name "necessity" given to a good that has a price elasticity of less than one, and the name "luxury" given to a good that has a price elasticity of more than one?

Goods that have a price elasticity of less than one are called "necessities" because the sale of the goods does not decrease significantly when the price is increased, as the goods are "necessary" Likewise, "luxury" goods are called that because they are "luxuries", so when the price goes up, the purchases go down.

OK, see explanation in model answers.

5. What is a substitute for french fries, and what is a complement for them?

Substitute-Onion rings Compliment-Ketchup

Correct, but note spelling: "complement" (with two "e"s)

6. Give an example of a "normal" good, and an example of an "inferior" good.

Normal-Laptop Inferior-Netbook

Good, may use as a model.

7. A "price ceiling" is a type of price control that sets the maximum price allowed by law for something (like a real ceiling). A "price floor" is a type of price control that sets a minimum price allowed by law for something (like a real floor). Does a price ceiling that is set below the equilibrium (free market) price cause a surplus or a shortage? Using the graph in this lecture, explain why a surplus or a shortage is created by a price ceiling.

A price ceiling below the equilibrium causes a shortage, because the supply and demand curves are not allowed to meet at the free market price. When the price is unnaturally lowered, the demand increases. The supply, however, does not change. So there are more people who want to buy the product, but the same amount of people supplying the product, creating a shortage. If the price ceiling was removed, manufacturers would charge more for their good, lowering the demand. The free market does not work properly with government interference.

Good, except the supply does decrease when a price ceiling is imposed. This is a major reason why it is objectionable. (Minus 1).

10. Do you support "free trade" because it creates wealth, or do you oppose it for simply redistributing wealth to foreigners, some hostile to the United States?

I think there’s a little more to the issue than that. I think the question to be asked is how free trade affects our economy. What do we stand to lose, and what could we gain? American businesses would have to improve their products and finances in order to match the other nations. They might be encouraged to be more responsible with their money. Are we encouraging laziness when we make it easier for American manufacturers to compete with foreign ones? When there are quotas or tariffs imposed, or subsidies and bailouts given, what are we saying? That the other nations’ products are just that much better, that without government assistance American companies wouldn’t have a chance of competing? If that is indeed the case, then we need to rethink some things. What about the ingenuity that helped create this country and caused it to prosper? Is the government killing it? I think that the positive aspects of free trade outweigh the negative ones by far, and that all parties involved in it benefit. Not just those hostile towards our country.

Good analysis. You make your point very well.
109/110. Excellent! Congratulations.--Andy Schlafly 08:11, 28 September 2009 (EDT)