Economics Model Answers Three

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Introductory: 1. In a free market, the responsiveness of demand to a change in price is known as its ____________.

Price elasticity of demand.

2. A good that is addictive often has (elastic or inelastic) demand for it. Choose the correct answer.

Inelastic.

3. Give examples of a complement and a substitute for breakfast eggs.

Complement for eggs: ham, bacon, toast, sausage, cheese, salt, pepper.

Substitute for eggs: oatmeal, french toast, pancakes, cereal.

Intermediary: 4. Describe a perfectly elastic demand curve, and a perfectly inelastic one.

Perfectly elastic: a horizontal line. Perfectly inelastic: a vertical line.

5. If the demand curve is a straight line having negative slope (i.e., increasing quantity as price decreases), then draw or describe the shape of its curve for price elasticity of demand.

The point here is that the price elasticity of demand changes depending on where you are on the straight-line curve, because price vvedge elasticity is a ratio of the percent change in quantity demanded to a percent change in price.

6. Describe what a negative income elasticity of demand means. Give an example of a good or service that might have a negative income elasticity of demand.

Negative income elasticity of demand refers to a good whose demand becomes less as people's income goes up. That is because it is a good that is a cheaper version of something. An example of a good that has a negative income elasticity of demand is generic drugs. As people’s income goes up, they will be more willing to pay extra for the brand name drugs. However, it is true that people are forced to pay for the brand name drugs until the original patent runs out. (thanks to Kevin for that)

Honors: 7. Suppose the demand for a special type of colored corn is inelastic. Suppose there was a disease that uniformly killed 20% of all the cornstalks, but did not affect demand at all (i.e., the public was not scared by the disease). Explain if corn farmers are better or worse off due to the disease, and why.

Farmers are better off, because the price increases and so do their profits.

Write an essay of about 200 words total on one or more of the following topics:

8. Should there be a minimum wage law?

9. Does free trade add value or simply redistribute wealth?

10. Is economics almost always determinative of the outcome on political issues, such as elections?

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