Economics Homework Three Answers - Student Seven

VeronikaF

1.Give an example of a good that has large price elasticity, meaning that a small decrease in price causes a big increase in demand.

A decrease in the price for a cell phone plan will immediately increase the demand. Today many of the cell phone plans are very expensive, but people have to pay the money since it is hard to survive in this century without a cell phone. This is a perfect example of where the companies take advantage of their costumers.

Terrific example, may use as a model.

2.Explain the concept of income elasticity.

Income elasticity is a concept which explains the effect income has on demand. It proves how demand increases when income increases, but in some cases the opposite occurs. As we all know, when you have extra money left over after paying all your expenses you treat yourself to some kind of luxury. This is the same for how the economy works. In some cases when the income increases the demand decreases. When we have some extra money we are willing to spend that extra money on better quality items. For instance, let’s say you are used to buying manual toothbrushes, but when you start getting a higher salary you start to buy more expensive electric toothbrushes because they clean your teeth better. In this case, the company who sells manual toothbrushes looses money. Money passes from wallet to wallet. Whoever has that money in their possession has the ability to affect the economy.

Excellent.

3.A nearly perfectly elastic demand curve is nearly _____ in shape; a nearly perfectly inelastic demand curve is nearly_______ in shape.

a) An arc b) Straight

As discussed in class, the question was inartfully worded, but the answer is (a) "horizontal" and (b) "vertical". (no points deducted but note the correct answer and understand why)

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?

The term “necessity” is given to a good that has a price elasticity of less than one because we need that good to survive in this society, but a good that has a price elasticity of more than one is called a “luxury” because we do not need that certain good for our survival; it is something extra for our enjoyment.

Not quite, due to a mistake in the question (full credit given). See model answers.

5\. What is a substitute for French fries, and what is a complement for them?

Potato chips are a substitute for French fries since they also are made from potatoes and are a snack food. A complement for French fires is ketchup. It brings some extra flavor to the salty, but bland French fries.

Corect.

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

Clothes are a “normal” good and hormone laced milk is an “inferior” good.

Took a while for me to understand why "hormone laced" milk is an "inferior" good, but I see why and give you full credit! Clever.

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.

A shortage is created when a price ceiling is set below the equilibrium because when the price decreases the demand increases. Setting a price ceiling below the equilibrium will cause a shortage because the companies selling those goods will be forced to decrease the price which then appeases the buyers since most people want to spend the least amount of money on a certain good. Eventually there will not be enough to go around which will cause a shortage. If the maximum price is increased, set above the equilibrium, the demands for that good will decrease since most people will not be willing to spend the amount the sellers are asking. The price ceiling is an important concept on how price affects the market.

Good answer, but needs to specifically explain that a price ceiling reduces supply, thereby being a big cause of the shortage. Government can't make people work, and fewer will work if the price the goods can be sold at are kept at a low price by a price ceiling. (Minus 1).

Honors

9\. Explain price discrimination, and conclude with your view of whether it should be legal or illegal.

I believe price discrimination is both good and bad. It depends in whose shoes you are in. If you are an average person, price decimation being legal will benefit you, but if you make more than a modest income, price discrimination might eventually hurt you. It helps the average person who continually struggles by making luxury goods, consumed by the wealthy, more expensive. For example, if an owner of a hockey rink did not have special seating for corporations and the wealthy, he would have to increase the price of each individual seat to meet his wanted income. So, by renting out luxury booths it helps meet the owner’s wants, but also gives the public a cheaper solution. If you have the money for luxury items, the price of things may be increased especially for you because you are able to meet a higher asking price. People would take advantage of you. The wealthier class would find it hard to survive because they would be spending relatively the same amount of money as the lower class according to their budgets. There would be many complaints from the rich, but satisfied smiles from the poor.

Terrific answer, model quality again! (Note, you probably meant "discrimination" rather than "decimation" in your answer).

11\. What is your view of the minimum wage? Should it be increased?

The minimum wage should be increased because each individual should be able to have some means of survival. Americans are so blinded by greed that they can not see all the people suffering from their merciless decisions for their wage. It is very difficult to survive in this type of economy and without a well paid job, one may be headed for destruction. People need to wipe away the shadow of greed from their eyes and realize how many people are struggling to evade a life of poverty.

Good expression of your opinion, but it does not address some of the harmful effects of increasing the minimum wage: increasing unemployment and increasing the teenage school dropout rate. But Your points are well taken and earn full credit.

Excellent work! 109/110, with several model-answer-quality responses. Congratulations.--Andy Schlafly 13:23, 27 September 2009 (EDT)