Economics Homework Three Answers - Student Sixteen

JonathanL

1.) A good that has a large price elasticity would be refined gasoline. A seemingly trivial drop in price from 2.50$ per gallon to 2.00$ per gallon would cause a tremendous increase in demand.

2.) The income elasticity is the percentage change in quantity demanded divided by the percentage change in income. For the most part what we buy in our daily life can be explained by income elasticity, such as when we are earning more money we tend to buy more luxury items, and conversely when we are earning less money we tend to buy less luxury items and just focus on the necessities. This is similar to an ice-cream salesperson at the beach. If the sun is shining, more people will be at the beach and thus more ice-cream will be sold. If there is an overcast of clouds with a slight drizzle, or the temperature is slightly lower than desired, far fewer “luxury items,” or ice-cream bars, will be bought.

3.) A nearly perfectly elastic demand curve is horizontal in shape, while a nearly perfectly inelastic demand curve has a vertical shape.

4.) Because a good with a price elasticity less than one would mean that the price dropped below 100% of its original state. The demand would increase and this good would be a necessity because more people would by the good with its lower price, meaning that they could not have or did not want to afford it at the original, higher price. Similarly, if price increased to above its original state, the demand for this good would drop, making it a luxury good because not as many people could afford the good at this new price. When normal goods increase in price this is usually a sign of “good times,” and vice-versa.

5.) A substitute for French fries would be tater-tots, while a compliment for French fries would be ketchup or a cheeseburger.

6.) An example of a normal good would be a flat screen tv, while an example of an inferior good would be microwave-able meals, because when people get wealthier, they can afford more expensive meals and will want less of the poorer tasting meals from the microwave.

7.) well if a price ceiling is set below the market price, this will cause a shortage because too many people will want the good for that low of a price, and if there is a price floor this will cause a surplus because if the price floor is too high to begin with, no one is going to by the good anyways.

See Also[edit]

Economics Model Answers Three - 2013