ECO202: Discuss the most Possible cause for the Difference in Price Elasticity of Demand Between Milk (type B) and Bread: (Online) Economic Ideas and Models for Business Assignment, SUSS, Singapore

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

Table 1: Price elasticities of demand for different types of food.

(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 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 the revenue of firms will increase or decrease.

(c) Government plans to keep people healthy by discouraging consumption of high-calorie food. A 20% excise tax will be imposed on one of the high-calorie food items which contain calories of 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.