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.

One example of a good that has a large price elasticity is digital music. When a person goes to purchase a song on iTunes and they find out the price for a song went up ten cents, there is a huge decrease in demand. (Leonard)

2. Explain the concept of income elasticity.

Income elasticity is defined as the percent change in quantity divided by the percent change in income, explaining the fact that as a person's income decreases, they have a lower demand for most goods--they cannot afford as much--and the corollary concept: when their income increases, the demand increases. Goods where the demand decreases when income increases are inferior goods, less desirable substitutes for something. A used car is an inferior good. (Duncan)

Income elasticity deals with the change in demand for a good based on buyers’ incomes. A good is considered “income elastic” if demand significantly decreases when incomes decrease. A good is considered “income inelastic” if demand remains roughly the same when incomes decrease. Necessary or basic goods are income inelastic because everyone, regardless of income, needs them (demand will still decrease but not very much); “luxury” or essentially unnecessary goods are income elastic. (Addison)

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. (Michelle)

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

A nearly perfectly elastic demand curve is nearly flat. A nearly perfectly inelastic demand curve is nearly vertical. (Mark)

a. horizontal b. vertical (Isaac)

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?

Editor's Note: this question has a mistake. It should have said "income elasticity" rather than "price elasticity."

A necessity is considered income elasticity because it is something that is needed, whether income is high or low. A luxury good is not a needed necessity therefore it is not purchased as often if the income is low. (Amanda)

Necessities are the goods we need. They are income inelastic. They are needed and purchased regardless of our income level. Examples would be basic food and clothing to get by. A luxury is a good we want. It income elastic don't generally purchase luxuries in hard economic times. (Shanna)

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

A substitute for french fries could be onion rings. A complement could be many things, hamburger, ketchup, hotdog, chicken tenders and much more. (Amanda)

A substitute for french fries would be actually believe it or not be steamed broccoli! I just recently went out to eat with my family, and my brother-in-law ordered chicken tenders, but instead of ordering french fries with them he ordered steamed broccoli for a more nutritional choice. For as long as I can remember going that particular restaurant, broccoli has always been the substitute for french fries, and I find it very interesting that obviously since they have kept it on their menu for long they are making money off of it! A complement for french fries would be ketchup, or soda, or a hamburger. (Deborah)

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

Just suppose you do not own a cow, but happen to be lucky enough to live near someone who does and who sells the milk produced by it. If your income is high, you will probably be able to buy some of the expensive, but deliciously creamy, "real milk". However, if your income is low and you simply can't use any of your money on this milk, you will probably be forced to resort back to the infinitely inferior milk sold in stores. The milk from the cow is a "normal good" and the milk sold in stores is an "inferior" good. (Trisha)

Normal = Legos. Inferior = Dollar Store toys (Aran)

An example of a “normal” good would be a laptop. When a income increases, there is more of a demand for newer electronics increases. An example of an “inferior” good would be used cars. An increase in income would allow people to have more money to spend on newer cars. The demand for used cars, which are generally cheaper, would decrease. (Allie)

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:

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

Price discrimination is the act of selling two identical goods to two different people, charging different prices for the two sales. It is technically illegal, as many feel it is unfair for a supplier to "exploit" one person by charging more, but it still goes on under the guise of different tricks. For example, at a ski mountain in Vermont where we usually go for a week in the winter, there are two classes of lift ticket for over-18s: Adult and Vermonter; a Vermonter ticket (which requires residence in the state) is 20% less than a normal one.

Price discrimination should not be illegal; the resale market for most goods prevents it (if a merchant sold a rug to one person for $2000 and to another for $2500, the one who got the better price would simply buy more rugs than he needed and resell them at a price lower than $2500 and more than $2000. For items such as lift tickets or a sweatshirt with your name on it, you cannot resell it, and the sellers, if discrimination is illegal, will simply find ways around it, as described above. Finally, poorer people will most likely get a better deal on things, as sellers know they cannot afford as high a price as the richer. (Duncan)

I believe price discrimination is both good and bad. It depends in whose shoes you are in. If you are an average person, price decimation being legal will benefit you, but if you make more than a modest income, price discrimination might eventually hurt you. It helps the average person who continually struggles by making luxury goods, consumed by the wealthy, more expensive. For example, if an owner of a hockey rink did not have special seating for corporations and the wealthy, he would have to increase the price of each individual seat to meet his wanted income. So, by renting out luxury booths it helps meet the owner’s wants, but also gives the public a cheaper solution. If you have the money for luxury items, the price of things may be increased especially for you because you are able to meet a higher asking price. People would take advantage of you. The wealthier class would find it hard to survive because they would be spending relatively the same amount of money as the lower class according to their budgets. There would be many complaints from the rich, but satisfied smiles from the poor. (Veronika)

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.