Suppose the income elasticity of demand for food is 0.45 and the price elasticity of demand is -1.00. Suppose also that Felicia spends $10,000 a year on food, the price of food is $2, and that her income is $25,000. If a sales tax on food caused the price of food to increase to $2.50, what would happen to her consumption of food? Because a large price change is involved, use the arc elasticity to measure the price elasticity of demand rather than a point elasticity. Felicia's consumption of food would decrease by 1000.00 units. (Enter your response rounded to two decimal places.) Suppose that Felicia gets a tax rebate of $2,500 to ease the effect of the sales tax. What would her consumption of food be now? (Again, use an arc income elasticity to answer this question instead of a point income elasticity.) Felicia's consumption of food would now be 4,175.18 units. (Enter your response rounded to two decimal places.) Is she better or worse off when given a rebate equal to the sales tax payments? Accurately draw the graph and explain. 1.) Using the line drawing tool, graph Felicia's budget line when the price of food is $2.50 and her income is $25,000. Label your line 'L₂'. 2.) Using the line drawing tool, graph her budget line when the price of food is $2.50 and her income is $27,500. Label your line 'L3'. Carefully follow the instructions above, and only draw the required objects.
Suppose the income elasticity of demand for food is 0.45 and the price elasticity of demand is -1.00. Suppose also that Felicia spends $10,000 a year on food, the price of food is $2, and that her income is $25,000. If a sales tax on food caused the price of food to increase to $2.50, what would happen to her consumption of food? Because a large price change is involved, use the arc elasticity to measure the price elasticity of demand rather than a point elasticity. Felicia's consumption of food would decrease by 1000.00 units. (Enter your response rounded to two decimal places.) Suppose that Felicia gets a tax rebate of $2,500 to ease the effect of the sales tax. What would her consumption of food be now? (Again, use an arc income elasticity to answer this question instead of a point income elasticity.) Felicia's consumption of food would now be 4,175.18 units. (Enter your response rounded to two decimal places.) Is she better or worse off when given a rebate equal to the sales tax payments? Accurately draw the graph and explain. 1.) Using the line drawing tool, graph Felicia's budget line when the price of food is $2.50 and her income is $25,000. Label your line 'L₂'. 2.) Using the line drawing tool, graph her budget line when the price of food is $2.50 and her income is $27,500. Label your line 'L3'. Carefully follow the instructions above, and only draw the required objects.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose the income elasticity of demand for food is 0.45 and the price elasticity of demand is
- 1.00. Suppose also that Felicia spends $10,000 a year on food, the price of food is $2, and that
her income is $25,000.
If a sales tax on food caused the price of food to increase to $2.50, what would happen to her
consumption of food? Because a large price change is involved, use the arc elasticity to measure
the price elasticity of demand rather than a point elasticity.
Felicia's consumption of food would decrease by 1000.00 units. (Enter your response rounded to
two decimal places.)
Suppose that Felicia gets a tax rebate of $2,500 to ease the effect of the sales tax. What would
her consumption of food be now? (Again, use an arc income elasticity to answer this question
instead of a point income elasticity.)
Felicia's consumption of food would now be 4,175.18 units. (Enter your response rounded to two
decimal places.)
Is she better or worse off when given a rebate equal to the sales tax payments? Accurately draw
the graph and explain.
1.) Using the line drawing tool, graph Felicia's budget line when the price of food is $2.50 and her
income is $25,000. Label your line 'L₂'.
2.) Using the line drawing tool, graph her budget line when the price of food is $2.50 and her
income is $27,500. Label your
line 'L3'.
Carefully follow the instructions above, and only draw the required objects.
Other Consumption
14000-
12000-
10000-
8000C₁
6000-
4000-
2000-
0-
co
0
4₁
2000 4000 6000 8000 10000 12000 14000
Food
N
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Step 1: Define Income Elasticity of Demand and Price Elasticity of Demand
VIEWStep 2: Calculate Initial Consumption of Food
VIEWStep 3: Calculate new consumption of food after the price increase
VIEWStep 4: Calculate consumption of food after Tax Rebate
VIEWStep 5: Graph due to increase in the price of good x and increase in income due to tax rebate.
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