Economics Homework Three Answers - Student Twenty-One

Michelle F-in progress

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.

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.

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

Horizontal, vertical.

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.

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

Substitute-Onion rings Compliment-Ketchup

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

Normal-Laptop Inferior-Netbook

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.