Economics Homework Three Answers - Student Fourteen

AmandaS.

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. Reality is a good example of this. Traditionally when home prices fall, demand goes up. If the price is too high for a house, people are most likely going to walk away whether the quantity is good or not. Right now the Market is sitting still due to the banking credit restrictions.

Good, interesting example. ("realty", not "reality", although the price elasticity of "reality" might be an interesting concept!)

2\. Explain the concept of income elasticity. Income elasticity is a measure of the relationship between a change in income and a change in quantity of a good demanded. When you have less income you tend to consume less. The luxury goods, such as nice cars, designer clothing and going to expensive restaurants are not done when income decreases.

Excellent.

3\. A nearly perfectly elastic demand curve is nearly ________ in shape; a nearly perfectly inelastic demand curve is nearly __________ in shape. A) A flat vertical line. B) A flat horizontal line.

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?: A necessity is considered income elasticity because it is something that is needed, whether income is high or low. A luxury good is not a needed necessity therefore it is not purchased as often if the income is low.

Excellent, may use as a model.

5\. What is a substitute for french fries, and what is a complement for them? A substitute for french fries could be onion rings. A complement could be many things, hamburger, ketchup, hotdog, chicken tenders and much more.

Superb.

6\. Give an example of a "normal" good, and an example of an "inferior" good. A normal good is purchased when income is high. An example of a normal good is an electronic device such as an iPod. IPods are very expensive, yet many people want them. An inferior good is something that is needed by almost everyone, such as gasoline.

Right about a normal good, but incorrect about an inferior good. (Minus 1) See model answers.

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 price ceiling limit on how high a price can be charged on a product. This will most like cause a shortage because the demand will exceed the supply.

Good, but also explain that the supply itself is reduced (independent of demand) due to the price ceiling.

68/70. Well done!--Andy Schlafly 23:30, 27 September 2009 (EDT)