Question

In 2016, Philadelphia imposed a tax of 1.5 cents per ounce on sweetened beverages, and PespiCo indicated that its sales in Philadelphia fell by 40 percent after the tax took effect. If the Price of PepsiCo's sweetened beverages in Philadelphia increased by 32 percent following the implementation of the tax, then demand for sweetened beverages in Philadelphia would be:

- elastic
- inelastic
- unit elasti
- perfectly inelastic

Answer 1

Based on the information provided, the demand for sweetened beverages in Philadelphia would be elastic. (Option A)

How is that so?

• Price change: The price of PepsiCo's sweetened beverages increased by 32%.
• Quantity change: PepsiCo's sales in Philadelphia fell by 40%.

We can calculate the price elasticity of demand using the following formula:

Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)

In this case, the price elasticity of demand is:

Price Elasticity of Demand = (-40%) / (32%) = |-1.25| ≈ 1.25

Considering the absolute profit of the price elasticity of demand is larger than 1, it indicates that demand is adaptable. This means that a trifling sum in price leads to a relatively big change in quantity required.

Answer 2

- inelastic

Step-by-step explanation:

Elasticity is a measure of the sensitivity of demand to the price of a product. If demand is elastic, bidders should avoid raising prices as demand decreases considerably. Conversely, when demand is inelastic, consumers are less sensitive to price changes. Thus, price increase does not have much impact on product demand.If after tax sales have plummeted 40%, this means that the demand for sugary drinks is elastic (price sensitive). On the contrary, if demand had increased 32% after tax, we would say that demand would be inelastic (not sensitive to price changes).