Chapter 2: The Price System

Question 1

evalaute the usefulness of PED (3)

Answer 1

1. data for 2 points in time are required
2. there are other factors that can change demand
3. collecting data is expensive

Question 2

significance (1) and limitation (2) of YED to businesses

Answer 2

significance

firms can change production from normal to inferior good during a recession. if the economic is in recession, demand for normal goods falls and inferior good rises

limitation

1. data for 2 points in time are required
2. difficult for a firm to switch production

Question 3

positive and negative XED are _ goods

Answer 3

positive - subsitute

negative - complementary

Question 4

disadvantages of subsidy (3)

Answer 4

1. firms lack incentive to improve
2. inefficient resource usage (overproduction)
3. not discriminatory (everyone will pay lower prices)