Economics Homework Three - Model

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.

2. Explain the concept of income elasticity.

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

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?

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

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.

Honors

Write an essay of about 200-300 words total on one or more of the following topics:

8. Take a straight line demand curve and describe the shape of the total revenue curve as a function of price.

9. Explain price discrimination, and conclude with your view of whether it should be legal or illegal.

10. Do you support "free trade" because it creates wealth, or do you oppose it for simply redistributing wealth to foreigners, some hostile to the United States?

11. What is your view of the minimum wage? Should it be increased?

12. Describe and discuss how wealth is created in society.