Difference between revisions of "Economics Homework 3 - Model"

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1.  What is a substitute for french fries, and what is a complement for them?
 
1.  What is a substitute for french fries, and what is a complement for them?
  
:
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:Substitutes:  hash browns, fruit, baked potato, salad, etc.
 +
:Complements: hamburger, ketchup, sauce, etc.
  
 
2. 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.
 
2. 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.
  
:
+
:Candy bars, iPhone, most electronics, etc.
  
 
3. Explain the  concept of income elasticity.
 
3. Explain the  concept of income elasticity.

Revision as of 22:32, 26 March 2013

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

Substitutes: hash browns, fruit, baked potato, salad, etc.
Complements: hamburger, ketchup, sauce, etc.

2. 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.

Candy bars, iPhone, most electronics, etc.

3. Explain the concept of income elasticity.

4. In connection with price elasticity of demand, a nearly perfectly elastic demand curve is nearly ________ in shape, while a nearly perfectly inelastic demand curve is nearly __________ in shape.

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

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

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.