answers-4 - Answers to Questions for Review 1. Salt is...

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Answers to Questions for Review 1. Salt is generally considered a good with few substitutes and, as the text points out, the income effect for salt is extremely small. 2. Unlike salt, education at a large private university has a large income effect. 3. See Figure 4-5 in the text. 4. Some examples: hamburger, generic beer, bus tickets, almost anything purchased at stores selling "as is" damaged or discontinued merchandise. 5. Yes. A downward-sloping PCC simply implies that as the price of a good falls, the consumer purchases so much more of the good that the proportion of income spent on the good actually increases. 6. Vertical summation would mean that each good could be jointly consumed. Horizontal summation means each person consumes their commodity and excludes others from it. 7. An elastic demand leads to revenue increases if price falls. An inelastic demand leads to revenue increases if the price increases. A unitary demand curve results in constant revenue no matter what price does. If price goes the opposite direction from that listed above, the revenue moves in the opposite direction also. 8. The slope of the demand will give only an absolute change number. It does not give a proportionate change. Since price sensitivity has little meaning apart from the proportion of change, elasticity is far better than slope at showing a useful responsiveness of demand to price. 9. Unitary 10. Since other good substitutes abound, a school will likely have a fairly elastic demand curve. 11. If income is shifted from the rich to the poor, those products consumed by poor people and not by rich will increase in demand and those goods consumed by the rich and not the poor will have a decrease in demand. 12. Companies that produce more necessary items rather than luxuries would be better to invest in than companies that produce luxury items since people will be paring down their expenditures. 13. False. In the diagram below, an increase in the price of X leads to a reduction in the amount of X consumed, but an increase in the quantity of Y.
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Y X X X Y 1 2 2 1 Y Positive income effect for both X and Y 14. The demand for tennis balls is elastic. When its price goes up, the total expenditure on the balls goes down. Thus, the share of income available for tickets increases. Since their price is constant, he consumes more tickets. 15. False. Look at Figure 4-16 in the text. Both individuals have linear demand curves, but the aggregate demand curve is kinked, not straight. 16. No. If bread is an inferior good, then as income increases, quantity demanded of bread decreases. If butter were an inferior good as well, then likewise, quantity demanded of butter would decline as income grows. However, spending on both goods cannot decline, because then there would be no way of spending the additional income. Thus, not all goods can be inferior.
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This note was uploaded on 04/08/2008 for the course ECON 302 taught by Professor Toossi during the Spring '08 term at University of Illinois at Urbana–Champaign.

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answers-4 - Answers to Questions for Review 1. Salt is...

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