Economics Homework Three Answers - Student Ten
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.
Gold. When the market price goes down people buy more because it is a good investment and they know the price will eventually go back up.
- Interesting example!
2. Explain the concept of income elasticity.
When people's income goes up, they tend to buy more goods and services.
- Right, but note that income elasticity is specific to a particularly good, just as price elasticity is. (Minus 1).
3. A nearly perfectly elastic demand curve is nearly vertical in shape; a nearly perfectly inelastic demand curve is nearly horizontal in shape.
- The opposite is true. (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?
When the price elasticity is low, generally it is a good that people need, such as food, fuel, or shelter, and will pay more for. In the equation, the change in Q is a smaller number than the change in P, so it is a proper fraction (<1). A luxury is something that people want, not really need, so they can do without it if the price goes up. The change in Q is larger than the change in P, so it will be an improper fraction (>1).
- Excellent statements, but see model answers for a discussion of the mistake in the question. Full credit given.
5. What is a substitute for french fries, and what is a complement for them?
Substitute = onion rings_________Complement = Ketchup
6. Give an example of a "normal" good, and an example of an "inferior" good.
Normal = Legos____Inferior = Dollar Store toys
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.
The supplier will find that it is not worth their time to make a product when the imposed ceiling is set unrealistically low by the government. This causes a shortage since the public will line up for a bargain price. On the graph the price ceiling is set far below the equilibrium point.
- 68/70, with some terrific answers. Well done!