ECON 201 Exam 1 (Ball State University) Questions & Answers: Updated Solution

What is a necessity good? (Ans- when the IED is less than 1. What is a luxury good? (Ans- when the IED is greater than 1. Cross Price Elasticity of Demand (CPED) (Ans- (% change in Qd of good 1) / (% change in P of good 2) What is perfectly inelastic? (Ans- when the supply or demand elasticity equals 0; the curve is a vertical line. What is inelastic? (Ans- when supply or demand elasticity is less than 1 What is unit elastic? (Ans- when supply or demand elasticity equals 1What is elastic? (Ans- when supply or demand elasticity is greater than 1 What is perfectly elastic? (Ans- when the supply or demand elasticity equals infinity; the curve is a horizontal line. How does the P.E.D. matter for changing revenue given a change in price? (Ans- Depending on whether P.E.D. (price elasticity of demand) is above or below 1 you could decrease total revenue or increase total revenue by increasing the price. How does the I.E.D. correspond to normal and inferior goods? (Ans- (Income Elasticity of Demand) - if the I.E.D. have positive income elasticities than it is a normal good; if the IED have a negative income elasticity than it is an inferior good.