Elasticity and Demand for Food

A. Consider the information on real-world price elasticities for ten countries. Why do you think the price elasticity of demand for food is higher in Tanzania than in the U. S.? What does this imply about food purchases in the U. S. and Tanzania?

B. The government wants to maximize its tax revenue. Revenue is equal to the amount of the tax times the quantity of goods sold (i. e., revenue Tax. Q). Which will provide more tax gasoline or a tax on restaurant meals? Why?

Why do you think the price elasticity of demand for food is higher in Tanzania than in the U. S.?

The price elasticity of demand for food is higher in Tanzania than in the U. S. because Tanzania is a much poorer country than the U. S., and a rise in food prices leads immediately to a large drop in demand, since most people will simply not have enough income to meet demand.

What does this imply about food purchases in the U. S. and Tanzania?

This implies that people in Tanzania spend less money on food, but also spend a larger share of their income on it.

Which will provide more tax gasoline or a tax on restaurant meals? Why?

The tax on gasoline will provide more funds because gasoline is a good that is way more inelastic than restaurant meals.

If restaurant meals become more expensive because of the tax, people will simply stop eating-out, and prepare home meals instead.

Gasoline, on the other hand, is very inelastic, and even if the price goes up a lot because of a very high tax, car owners will still have to purchase it, raising government revenue.