Economics Homework Three Answers - Student Eight

Economics Homework Three

Duncan B.

1. "Luxury goods" are goods which have a high price elasticity, like an powerful and modern computer: if the price is increased a little, demand drops rapidly; if the price is decreased a little, demand radically increases.

Excellent.

2. Income elasticity is defined as the percent change in quantity divided by the percent change in income, explaining the fact that as a person's income decreases, they have a lower demand for most goods--they cannot afford as much--and the corollary concept: when their income increases, the demand increases. Goods where the demand decreases when income increases are inferior goods, less desirable substitutes for something. A used car is an inferior good.

Fantastic answer, one of the best all year. Will definitely use as a model answer!

3. A nearly perfectly elastic demand curve is nearly flat in shape; a nearly perfectly inelastic demand curve is nearly vertical in shape.

Terrific, could use this as a model answer also.

4. Items which have a price elasticity less than one are considered necessities because even when the price rises most consumers still purchase them, whereas , with a good with a price elasticity of more than one, people will not purchase nearly as many if the price rises, causing the designation of unnecessary. This can be inaccurate, as New York Yankees tickets or popular video games are not "necessary."

After grading this I realized this question has a mistake in it. See model answers.

5. Potato chips are a (poor) substitute for french fries; ketchup is a (necessary) complement for them.

Correct, with good humor! I enjoyed your parentheticals.

6. An example of a normal good--one where the demand increases as income increases --is an expensive cell phone such as the iPhone. An inferior good, like a free cell phone, is one the demand for which decreases when income increases.

Correct again.

7. A price control which places the maximum price below the free market price always creates a shortage. The number demanded greatly increases, shifting the demand point to the right on the quantity axis, but the supply remains stable or decreases.

Right, but note that the supply almost always decreases due to a price ceiling (unless the supply curve were somehow flat).

Honors

9. Price discrimination is the act of selling two identical goods to two different people, charging different prices for the two sales. It is technically illegal, as many feel it is unfair for a supplier to "exploit" one person by charging more, but it still goes on under the guise of different tricks. For example, at a ski mountain in Vermont where we usually go for a week in the winter, there are two classes of lift ticket for over-18s: Adult and Vermonter; a Vermonter ticket (which requires residence in the state) is 20% less than a normal one. Price discrimination should not be illegal; the resale market for most goods prevents it (if a merchant sold a rug to one person for $2000 and to another for $2500, the one who got the better price would simply buy more rugs than he needed and resell them at a price lower than $2500 and more than $2000. For items such as lift tickets or a sweatshirt with your name on it, you cannot resell it, and the sellers, if discrimination is illegal, will simply find ways around it, as described above. Finally, poorer people will most likely get a better deal on things, as sellers know they cannot afford as high a price as the richer.

Terrific answer, model-answer quality.

This is the best homework paper in the entire class this week, and perhaps the best for entire course. 110/110. Congratulations!