The prices and elasticities for some different types of food are summarised in Table 1. (a) Discuss the most possible cause for the difference in price elasticity of demand between milk (type B) and bread. (b) Suppose that a consumer currently spends on average $30 per month on high-calorie milk and that the price of high-calorie will milk increase by 10% next month. Estimate the expected percentage change in the quantity demanded for high-calorie milk products. In addition, calculate the expected change in revenue for sellers of high- calorie milk firms after the price change. Explain why revenue of firms will increase or decrease. (c) Government plans to keep people healthy by discouraging consumption of high-calorie food. A 20% excite tax will be imposed on one of the high-calorie food items which contains calories more than 1550 per serving. For three different policy goals: (i) maximization of tax revenue, (ii) maximization of reduction in high-calorie food consumption and (iii) minimization of loss in market efficiency (or deadweight loss), select the best policy choice as your recommendation for imposing the tax. Explain the rationale of your recommendation.

ECON MICRO
5th Edition
ISBN:9781337000536
Author:William A. McEachern
Publisher:William A. McEachern
Chapter5: Elasticity Of Demand And Supply
Section: Chapter Questions
Problem 2.4P
Question

The prices and elasticities for some different types of food are summarised in Table 1.

(a) Discuss the most possible cause for the difference in price elasticity of demand between milk (type B) and bread.

(b) Suppose that a consumer currently spends on average $30 per month on high-calorie milk and that the price of high-calorie will milk increase by 10% next month. Estimate the expected percentage change in the quantity demanded for high-calorie milk products. In addition, calculate the expected change in revenue for sellers of high- calorie milk firms after the price change. Explain why revenue of firms will increase or decrease.

(c) Government plans to keep people healthy by discouraging consumption of high-calorie food. A 20% excite tax will be imposed on one of the high-calorie food items which contains calories more than 1550 per serving. For three different policy goals: (i) maximization of tax revenue, (ii) maximization of reduction in high-calorie food consumption and (iii) minimization of loss in market efficiency (or deadweight loss), select the best policy choice as your recommendation for imposing the tax. Explain the rationale of your recommendation.

Table 1: Price elasticities of demand for different types of food.
Тypіcal
Spending per Demand (in absolute
week ($)
Price Elasticity of
Price per
100 g (S)
Food
Calories
Categories per serving
value)
Fruit
Vegetables
660
0.4
2
1.13
140
0.35
3.5
0.85
Pasta
1550
0.4
0.88
Bread
950
0.6
2.5
0.29
Snacks
430
1.2
5
0.27
Candy
Milk - A
Milk - B
1750
0.7
8.
0.30
2100
0.1
2.5
1.78
880
0.2
1.5
1.98
Transcribed Image Text:Table 1: Price elasticities of demand for different types of food. Тypіcal Spending per Demand (in absolute week ($) Price Elasticity of Price per 100 g (S) Food Calories Categories per serving value) Fruit Vegetables 660 0.4 2 1.13 140 0.35 3.5 0.85 Pasta 1550 0.4 0.88 Bread 950 0.6 2.5 0.29 Snacks 430 1.2 5 0.27 Candy Milk - A Milk - B 1750 0.7 8. 0.30 2100 0.1 2.5 1.78 880 0.2 1.5 1.98
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