Question

we need to think not only about the environmental externalities but also the nutritional externalities. How elastic do you think the demand for apples is? How about a bag of chips? Which is more likely to have a subsidy thrown in to affect the price?

Answer 1

Ans: The elasticity is the degree of responsiveness to change in quantity demanded due to change in its price.

As far as the nutrition is concerned, apples are more nutritious than a bag of chips. People are more likely to consume apples (fruits) than a bag of chips because apple is more nutritious and healthy while a bag of chips is a type of fast food and causes lot of health problems.

Therefore, if the price of apple increases, the demand for apples falls by very small amount. So, we can say that demand for apples is inelastic ( less than unit elastic (e<1) but not perfectly elastic because consumers can switch to other fruits). The demand for apples is inelastic because whatever be the price, people still purchases apples because of its health benefits.

While, the demand for chips is elastic (more than unit elastic) e>1, because a rise in price of chips, the demand for chips decreases. People know that it is not healthy for them and causes lot of health problems like obesity, etc. So, the demand is elastic.

As far as the subsidies are concerned, government provides more subsidies to the manufacturer of fast food products. The government provide them a lot of benefits for setting up their restaurant, food chains, factories, etc. because they generate employment. While, the government does not give much subsidy to healthy products.

If you compare the price of a bag of chips with the apples, a bag of chips would be less expensive than few apples.