Economía

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Unit 4 Elasticity Review 3
1. What is the equation for Income Elasticity of Demand?
% Change in Quantity Demanded/ % Change Income ofConsumer


2. What does a positive YED value mean?
That it is a normal good

3. What does a negative YED value mean?
That it is an inferior good

4. What is the significance of aYED value between 0 and 1?
For normal good, demand becomes income – elastic.
% Rise in income is less than the % rise in quantity demanded

5. What is the significance of YED value greaterthan 1?
For normal goods, demand changes substantially if income rises. Needs are satisfied, buy things that you want/desire

* An individual’s income increase from $50,000 to $55,000 per year.This person’s consumption of vegetables increases from $500 to $550 dollars per year and this person increases spending on clothing from $1000 dollars per year to $1500.
6. Calculate this personsIncome Elasticity of Demand for vegetables.
50/500 = 10%
5,000/50,000 = 10%
YED = 1

7. Calculate this persons Income Elasticity of Demand for clothing.
500/1000 = 50%
5,000/50,000 = 10%YED = 5

8. Explain what the YED value means for vegetables?
It means that for this person in particular, vegetables is a normal good that is income-elastic

9. Explain what the YED valuemeans for clothing?

10. What is a price floor? What are the consequences on the market?
Minimum price allowed by the law. This makes it go above the equilibrium and create surplus. There will be amisuse of scarce resources. Producers are making too much of something consumers aren’t demanding.

11. What is a price ceiling? What are the consequences on the market?
Maximum price allowedby the law. Often below the equilibrium point.
Shortage will occur. More demand than supply. Producers have incentive to keep prices low = make crappy product low quality. Consumers can get cheap...