Economics Homework Three Answers - Student Six

AddisonDM 09:21, 25 September 2009 (EDT)

1.First of all such a good has an “elastic demand,” greater than 1. It seems to me something like a GPS unit would have an elastic demand. When they are expensive, people view them as unnecessary luxuries, but when they go down in price they are viewed more as a useful addition, a sort of “might as well” item.

Superb.

2.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.

Terrific, will probably use as model answer.

3.My original, somewhat guess answer was: Elastic- right angled. Inelastic- straight. Now that you’ve discussed the answer in class, it is Elastic- horizontal line, Inelastic- Vertical line.

OK, full credit. Your honesty is rewarded and appreciated.

4.Because “necessities” are goods which buyers simply cannot do without, at least completely. Luxuries are unnecessary or sometimes useless, and someone who cannot afford them (and does not abuse their credit) will not spend their money, needed for necessities, on luxuries.

Right, and you explained their elasticity in a prior question. Full credit.

5.A substitute for French fries could be, say, a baked potato, or to break the mold a little more another starch such as rice pilaf. One complement (and the best one!) is ketchup.

Superb.

6.A normal good, one the demand of which goes up when incomes go up, could be any electronic device such as a camera, iPod, or cell phone. An inferior good, the demand of which decreases with an increase in income, might be the lunchmeat bologna, which would be replaced by ham, smoked turkey, or any healthier and more expensive meat.

Terrific.

7.A price ceiling below the market price creates a shortage, because demand increases due to the lower price while supply does not have a chance to adjust to the demand accordingly (or assuming the price ceiling is enacted because there is a shortage, it will not do much to help.) In terms of the graph, the price is set lower on the price curve than equilibrium, such that demand increases. This demand increase then causes supply to be lower on the supply curve than at equilibrium.

Correct.

10\. Free trade does not have to mean “unlimited free trade.” Of course I don’t believe we should trade with nations hostile to us, but there is no reason we shouldn’t choose to trade with our allies. For example, I would not support an “Iran free trade agreement,” but I do support the Columbia free trade agreement. In that case, we are actually benefiting the other nation which is poorer than us.

I see no problem with redistributing wealth per se, but only with redistributing it to foreign enemies. If in the process of trade we are helping the economies of poorer countries, then it is really a win-win situation.

Trade, however, should be reciprocal, and I do think we should have more production in the United States. Free trade should not mean depleting our resources and turning them over to another country, as trade with China appears to be doing, but rather mutually exchanging goods and thus mutually increasing wealth.

Excellent, could use this as a model answer also.

Perfect score! 110/110. The first in the class this week. Congratulations.--Andy Schlafly 00:51, 27 September 2009 (EDT)