Economics Homework 3 - Model

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

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.

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.