Question

1. Suppose that the Danish Government wants to reduce the quantity of coconut oil consumption by 23% in order to reach their health improvement goals. How much does the tax need to be in order to meet their goals assuming a price elasticity of demand of 0.5? (Show your calculations for full points)

2. Suppose the Danish Government implements a 50% tax on coconut oil. How much will coconut oil consumption drop by if we assume a 0.5 price elasticity of demand? Will the Danish Government reach its goal of reducing coconut oil consumption by 20%? (Show your calculations for full points)

Answer 1

Ans:

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

*Price and demand is inverse relationship

1).

Danish Government wants to reduce the quantity of coconut oil consumption = 23%

price elasticity of demand = 0.5

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

0.5 = 23 / % Change in Price

% change in price = 46%

So as seen required price is 46% high then previous price so, Tax needed to to be in order to meet their goals is 46% . Ans.

2).

The Danish Government implements a 50% tax on coconut oil

price elasticity of demand = 0.5

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

0.5 = -% Change in Quantity Demanded / 50

% Change in Quantity Demanded = -0.5*50 = -25%

So as seen required demand after 50% tax is 25% drop then previous demand so, Yes - the Danish Government will reach its goal of reducing coconut oil consumption by 20% . Ans.