Glendale Community College » Economics » Econ 101 - Microeconomics » Winter 2022

Econ 101 - Microeconomics » Winter 2022 » Ch 6 Application Exercise Part 1

Need help with your exam preparation?

Question #1

Economists in the Mexican Government suspect that a relatively large tax will reduce soda consumption by a very small amount. Are they assuming that the price elasticity of demand for soda is elastic or inelastic?

A. elastic

B. inelastic

C. perfectly inelastic

D. perfectly elastic

Question #2

Why does the price elasticity of demand for soda differ between low income and high income individuals?

A. All of the available answers are correct.

B. A tax or price increase, on low income individuals is a much lower percentage of an individual's budget and income when compared to high income individuals. So they are much less sensitive to price increases when compared to high income individuals. Therefore, we would expect the price elasticity of demand for low income individuals to be much lower than high income individual's and the overall population's price elasticity of demand.

C. A tax or price increase, on low income individuals is an percentage of an individual's budget and income when compared to high income individuals. So they are not anymore sensitive to price increases when compared to high income individuals. Therefore, we would expect the price elasticity of demand for low income individuals to not differ with high income individual's and the overall population's price elasticity of demand.

D. A tax or price increase, on low income individuals is a much higher percentage of an individual's budget and income when compared to high income individuals. So they are much more sensitive to price increases when compared to high income individuals. Therefore, we would expect the price elasticity of demand for low income individuals to be much greater than high income individual's and the overall population's price elasticity of demand.

Question #3

After implementing small scale experiments with both taxes they estimate that price elasticity of demand for soda is 1.4 and 0.4 for high-calorie snack foods. Assume that the Mexican Government wants to collect as much revenue as possible and only has the resources to tax either soda or high-calorie snack foods. Which one will the Mexican Government choose to tax? Why?

A. The Mexican Government will choose to tax soda because soda is always elastic.

B. If the goal is to raise as much revenue as possible the Mexican Government would choose to tax high-calorie snack foods because the price elasticity of demand is greater than soda. This means that consumers of high-calorie snack foods are much more price sensitive compared to soda consumers. Thus, if taxed, their reduction in consumption will be greater than their soda counterpart's reduction in consumption.

C. If the goal is to raise as much revenue as possible the Mexican Government would choose to tax high-calorie snack foods because the price elasticity of demand is less than soda. This means that consumers of high-calorie snack foods are not as price sensitive compared to soda consumers. Thus, if taxed, their reduction in consumption will be less than their soda counterpart's reduction in consumption.

D. The Mexican government will choose to tax soda because its price elasticity of demand is greater than the price elasticity of demand for high-calorie snack foods.

Question #4

Suppose that the Mexican Government wants to reduce the quantity of soda consumption by 20% in order to reach their health improvement goals. By what percentage, does the tax need to increase price in the market in order to meet the Mexican Government's goals? (Assume that the estimated price elasticity of demand for soda is 1.4)

A. 20.1234%

B. 28.00%

C. 14.285714%

D. 1.40%

Question #5

Suppose the Mexican Government implements a tax on soda that increases the market price by 5%. How much will soda consumption drop by if we assume a 1.4 price elasticity of demand? Will the Mexican Government reach its goal of reducing soda consumption by 20% ?

A. No because consumption will only be reduced by 7.0%.

B. No because consumption will only be reduced by 5.445%.

C. Yes because consumption will be reduced by 28.0%

D. Yes because consumption will be reduced by 20.0%.

Question #6

Suppose that the Mexican Government decides not to implement the national soda tax after intense lobbying by Coca-Cola. Cuernavaca—a small metropolitan area outside of Mexico City—being fed up with inaction at the national level decides to implement its own tax to tackle the diabetes epidemic in its community. What may cause this tax to fail at reaching its health goals?

A. Cuernavaca is a large geographic region compared to Mexico nationally overall. Thus, citizens in Cuernavaca cannot avoid the tax by going outside of Cuernavaca's geographical region to another city that doesn't have the tax in place. A tax at the national level is much easier to avoid.

B. There is nothing that can cause the tax to fail in reaching the defined health goals.

C. Cuernavaca is a small geographic region compared to Mexico nationally overall. Thus, citizens in Cuernavaca can avoid the tax by going outside of Cuernavaca's geographical region to another city that doesn't have the tax in place. A tax at the national level is much more difficult to avoid.

D. All of the available answers are correct.

Need help with your exam preparation?

Existing Quiz Clients Login here