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

Correct.

6\. Give an example of a "normal" good, and an example of an "inferior" good.

Normal = Legos____Inferior = Dollar Store toys

Superb.

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.

Correct.

68/70, with some terrific answers. Well done!

''''''Aran M.''''''