Suppose the income elasticity of demand for food is 0.50 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 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 4,195.12 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. IN Felicia with the rebate is ⒸA. equally well off because she could have consumed her original bundle. OB. worse off because she could have selected her original bundle but chose not to. OC. better off because she could have selected her original bundle but chose not to. OD. worse off because she does not continue to consume her original bundle. O E. equally well off because she again consumes her original bundle. Other Consumption 14000 12000- 10000- 8000-C₁ 6000- 4000- 2000- 0 0 U₁ F₁₂ 4₁ 2000 4000 6000 8000 10000 12000 14000 Food
Suppose the income elasticity of demand for food is 0.50 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 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 4,195.12 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. IN Felicia with the rebate is ⒸA. equally well off because she could have consumed her original bundle. OB. worse off because she could have selected her original bundle but chose not to. OC. better off because she could have selected her original bundle but chose not to. OD. worse off because she does not continue to consume her original bundle. O E. equally well off because she again consumes her original bundle. Other Consumption 14000 12000- 10000- 8000-C₁ 6000- 4000- 2000- 0 0 U₁ F₁₂ 4₁ 2000 4000 6000 8000 10000 12000 14000 Food
Chapter5: Elasticity Of Demand And Supply
Section: Chapter Questions
Problem 4.9P: (Other Elasticity Measures) Complete each of the following sentences: a. The income elasticity of...
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Transcribed Image Text:Suppose the income elasticity of demand for food is 0.50 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 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 4,195.12 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.
Felicia with the rebate is
A. equally well off because she could have consumed her original bundle.
B. worse off because she could have selected her original bundle but chose not to.
C. better off because she could have selected her original bundle but chose not to.
D. worse off because she does not continue to consume her original bundle.
E. equally well off because she again consumes her original bundle.
C
Other Consumption
14000-
12000-
10000-
8000-C₁
6000-
4000-
2000-
0+
0
U₁
1
2000 4000 6000 8000 10000 12000 14000
Food
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