Economics Homework Three Answers - Student Four

Anna M

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.

An example would be computers or electronics. If the price decreases only slightly, people jump at the chance to buy the product.

Excellent.

2. Explain the concept of income elasticity.

When income increases, demand for products increases, since people have more money to spend.

Good, but incomplete. Income elasticity is specific to each good. (Minus 1).

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

a. horizontal - b. 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?

A necessity is something that people will buy whether the price is high or low. This makes the price in-elastic, because there is no need to change it to fit the demand. Demand and quantity are almost always the same. A luxury is something that people will only buy when they have the money for it. This makes the price elastic, since it needs to raise or lower to fit the demand curve.

Not entirely credit due to a mistake in the wording of the question. See model answers. (Full credit given).

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

A substitute could be onion rings, and a complement would be a cheeseburger or drink.

Terrific.

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

A normal good is something that people buy more of when their income is high, and an inferior good is something that people buy less of when their income is high.

Right, but note that it is the marginal change in income that matters. "... when their income is higher." Also, the question asks for examples. (Minus 1).

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 would cause a shortage of supply. If the supply was lower than the demand, the manufacturers don't want to make the product, but people want to buy it. A shortage occurs when demand exceeds supply.

Good, but manufacturers don't want to make the product because the selling price is low, not because supply is lower than demand. (Minus 1).

Good work, 67/70.--Andy Schlafly 22:26, 26 September 2009 (EDT)