Suppose the income elasticity of demand for food is 0.5 and the price elasticity of demand -1.0. Suppose also that your housemate Claire spends $10,000 per year on food, that the price of food is $4, and that her income is $50,000.a) If a $4 sales tax on food were to cause the price of food to double, how much food would Claire’s consume?b) Suppose she is given a state sales tax rebate of $5,000 to ease the effect of the tax. Now how much food would she eat?c) Briefly discuss how you know whether she would be better or worse off when given a rebate to the sales tax payments?

Answered: Suppose the income elasticity of demand…

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 0.5 and the price elasticity of demand -1.0. Suppose also that your housemate Claire spends $10,000 per year on food, that the price of food is $4, and that her income is $50,000.

a) If a $4 sales tax on food were to cause the price of food to double, how much food would Claire’s consume?
b) Suppose she is given a state sales tax rebate of $5,000 to ease the effect of the tax. Now how much food would she eat?
c) Briefly discuss how you know whether she would be better or worse off when given a rebate to the sales tax payments?

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