Economics Homework Three Answers - Student One

DeborahB.

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 of a good that has a large price elasticity would be oil. When the price of oil goes down, the price of gas goes down, and when gas prices are low people jump at the opportunity for cheap gas and are a lot more willing to go places, which makes more people buy gas, which makes a huge increase in demand. For example, someone living in New Jersey would be a lot more eager to go visit relatives in Pennsylvania one month if gas was cheaper then it was the month before when they wanted to go but decided to stay home because gas prices were too expensive.

Excellent. Terrific explanation.

2. Explain the concept of income elasticity. Income elasticity means that as the income of people increases, the amount of goods sold increases as well, because when people have more money they are more likely to take the opportunity to do things they cannot normally do, like go out to eat are restaurants, go to the mall and buy clothes they do not need, etc. More people, buying more things, making the demand go up, because their income went up.

Good, but not quite complete. (Minus 1).

3. A nearly perfectly elastic demand curve is nearly ________ in shape; a nearly perfectly inelastic demand curve is nearly __________ in shape. a) perfectly flat vertical line. b) perfectly flat horizontal line.

The opposite order of what you said. (Minus 1).

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? Because a necessity is something that people need that they have to spend money on whether they have that money or not, whereas a luxury is something that people do not need that they only buy when they have extra money or when they are making themselves more in debt when they don't really have the money.

Superb.

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

Terrific, model answer quality.

6. Give an example of a "normal" good, and an example of an "inferior" good. A normal good is one for which demand increases when income increases: a normal good would be a luxury car. When the economy is doing well, people have more money, which makes them buy more expensive cars, which in turn makes the demand for those cars go up. An inferior is one for which demand actually decreases when income increases. An example of an inferior good would be a very common well-known food, ramen noodles. Although they have very poor nutritional value, ramen noodles are so cheap that almost anyone can afford the, even the poorest of people. But when the economy prospers and people have more money, they will seize the opportunity to buy something more nutritional that costs more money because now they can. This makes the demand decrease.

Superb again.

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

No answer. (Minus 10)

Score: 59/70, with some terrific answers.--Andy Schlafly 22:21, 25 September 2009 (EDT)