Question

According to the article, purchases of sugary beverages went down 12% in 53 Mexican cities as a result of a 10% tax. What kind of demand for sugary beverages does this trend indicate? Choose one: A. inelastic B. elastic C. unit elastic D. perfectly elastic E. perfectly inelastic

Answer 1

Elastic

Step-by-step explanation:

A demand for a commodity is said to be elastic when the percentage in quantity demanded of the commodity is greater than the percentage change in the price of that same commodity. That is, the price elasticity demand for the product is greater than one.

From the question, an increase in tax on the commodity by 10% will increase the price of the commodity by 10%. Since the fall of 12% in the purchases of sugary beverages in 53 Mexican cities is greater 10% increase in tax as a result of tax, the demand for sugary beverages elastic, that is greater than one. This can be calculated as follows:

Ep = % change in quantity demanded ÷ Percentage change in price

Ep = 12% ÷ 10% = 1.2

Where Ep indicates price elasticity of demand.

Since Ep is equal to 1.2, the demand for sugary beverages is elastic.

Answer 2

B) Demand is price elastic

Step-by-step explanation:

Elasticity of demand is the degree of responsiveness of demand to a change in price. It measures how much is effected on quantity demaned as a result of a unit change in price.

It is calculated as % change in quantity demanded by % change in price.

PED = % change in Quantity demanded/ % change in price

IF PED is greater than 1, demand is price elasitic

If IF PED is less than 1, demand is price inelasitic

If IF PED is equal to one, it is unitary

If the % change in price produces a more than proportional change in demand , PED is elastic.

In this question , a 10% increase in price as a result of tax produces 12% fall in demand, so PED = 12%/10%= 1.2.

PED is greater 1, Therefore, demand is price elastic