Question

1) If a decrease in income leads to an increase in the demand for fast food restaurants, then fast food restaurants is:
a. an inferior good. b. a neutral good. c. a necessity. d. a normal good.

2) If a good has many close substitutes, then its demand is most likely:
a. elastic. b. inelastic c. unit elastic. d. perfectly inelastic.

3) All of the following statements are true EXCEPT (hint: factors of price elasticity)

A) the demand for clothing is less elastic than the demand for blue jeans.
B) the demand for gasoline is more elastic the longer the time elapsed.
C) the smaller the proportion of income spent on a good, the more inelastic demand will be.

D) the demand for Nike running shoes is less elastic than the demand for shoes.

Answer 1

1. inferior good.

Inferior good is a good whose demand increases when one's income falls.

2. elastic.

A good with close substitutes have an elastic demand because a price increase of one good induces consumers to increase the demand of its substitute whose price remains unchanged. Thus, consumers change their preference for a particular good.

3. the demand for Nike running shoes is less elastic than demand for shoes.

Demand for shoes is less elastic since it is a necessity or a comfort good. But demand for Nike shoes is elastic since it has close substitutes that is other brands. If price of nike shoes increases, people will shift their preference for some other brand of shoe whose price has not increased.