Economics Homework Three Answers - Student Twelve

Homework by AroM

1. An example of a good with high price elasticity is carbonated beverages. This is demonstrated by the way in which many grocery stores alternate which major brand of soda (Coca Cola) is on sale week to week so that one brand is always markedly less expensive than the other. The amount of soda on sale that is sold is significantly higher than the product with the higher price, as measured by the observable levels of inventory remaining. Soda is completely a luxury, and quantity sold is highly responsive to price levels.

Excellent.

2. Income elasticity refers to how demand for a good is affected by changes in income level. Goods with a positive income elasticity (such as lobster and crab) are in greater demand as income increases. Goods with a negative income elasticity (such as TV dinners or Ramen noodles) are in less demand as income increases as consumers switch away from these goods to items they prefer and can now afford.

Excellent again.

3. A nearly perfectly elastic demand curve is nearly a horizontal line in shape (quantity demanded changes quickly with small price changes)

A nearly perfectly inelastic demand curve is nearly a vertical line in shape (quantity demanded changes little as price changes)

Correct.

4. Necessities have smaller price elasticities because people are forced to use them regardless of price. This indicates their use of the good is a NEED rather than a choice. Hence the term necessity. For example, gasoline is somewhat price inealstic because many people who don't have access to alternative transit options will be forced to drive no matter what the price is set at. That makes gasoline a necessity.

Luxuries can easily be substituted away from and the use of those goods is discretionary. This is also why they are price elastic. Observing the price elasticity of goods allows one to easily determine which goods are necessities and which are luxuries by seeing how easy it is for consumers to alter their consumption patterns.

This isn't correct, perhaps due to an error in the assumption of the question. Full credit given but please see the model answers.

5. A substitute for french fries would be another side item such as onion rings. A complement for french fries would be catsup.

Correct.

6. A normal good would be flat screen televisions. An inferior good would be standard rabbit ear receivers as those with more income will switch away to cable and satellite options.

Good again.

7. A price ceiling below the free market price causes a shortage. This is because there is a gap between the amount of a good that suppliers will be willing to produce at that price and the amount of a good that consumers will demand. Because the price is lower demand will outstrip supply and a shortage will occur. This gap can be seen on the graph in the lesson by the space between the demand curve and the supply curve bridged by the price ceiling level.

Right, but incomplete. The price ceiling causes the supply (or output) to decrease. That's an important result that needs to be emphasized for its own hurtful effect.

11. I believe minimum wages are a good thing for a number of reasons. First, and most obviously, they put more money in the hands of people who are poor and thus spend a high percentage of their resources. This stimulates overall consumption in the economy and leads to greater total economic activity than giving this money to others that may save.

Second, poverty rates have fallen as minimum wages have been imposed, indicating that even if the total number of jobs given to poor people is lower as a result of the price floor the percentage of people living in poverty has declined. This seems to indicate that minimum wages have been, in the net, positive for poor people rather than negative. By analogy it is better to give 80 out of 100 people a wage they can live on and support the other 20 through other means than given all 100 a wage they cannot live on and be forced to subsidize all of them.

Third, low income workers do not have significant leverage or fair negotiating power with employers. Many of them are extremely poor and will be forced to take the first job they can find regardless of pay rates because they need to feed themselves or their family. This could lead to predatory practices of paying employees nearly nothing by employers. This chain of events is part of the reason illegal immingrants make so little in the United States and are forced to live in incredibly crowded and filthy conditions: they are unable to gain any leverage to negotiate better rates for themselves. Minimum wages secure for the poor the ability to gain a living wage without having to negotiate for it fruitlessly.

Given those benefits, I am willing to accept the apparent cost of higher unemployment rates. Obviously, this is a value judgment that could go the other way.

Interesting analysis, but flawed in several important respects. Your first point about putting more money in the hands of poor, for example, does not follow from imposing a minimum wage. Employers will hire less workers, and the overall payment to the poor will depend on whether that reduction in demand is greater than the increase in wage. Also, many grabbing the minimum wage will be teenagers dropping out of school rather than the real poor. Your second point about suggesting that poverty rates have fallen due to the minimum wage would require, at a minimum, some historical analysis between minimum wage hikes and poverty levels. Much bigger factors affecting poverty include the success of free enterprise.

Your third point is your best, and what earns you a 35 out of 40 here. But even that raises questions about the competition for low-cost labor by many industries. If that competition exists, then the lack of bargaining power is irrelevant. But thanks for the interesting analysis.

104/110. Good work.--Andy Schlafly 21:49, 27 September 2009 (EDT)