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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.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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
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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