Question

. Suppose the income elasticity of demand for food is 0.5 and the price elasticity of demand is −0.25. Suppose also that Mia spends $10,000 a year on food, the price of food is $2, and that her income is $35,000. (10 pts) a. If a sales tax on food caused the price of food to increase to $2.50, what would happen to her consumption of food? (Hint: Because a large price change is involved, you should assume that the price elasticity measures an arc elasticity, rather than a point elasticity.)

b. Suppose that Mia gets a tax rebate of $500 to ease the effect of the sales tax. What would her consumption of food be now?

Answer 1