Question

1. The income elasticity for most staple foods, such as wheat, is known to be between zero and one.

1. As incomes rise over time, what will happen to the demand for wheat?
2. What will happen to the quantity of wheat purchased by consumers?
3. What will happen to the percentage of their budgets that consumers spend on wheat?
4. All other things equal, are farmers likely to be relatively better off or relatively worse off in periods of rising incomes?

2. Governments impose excise taxes on goods that have inelastic demand, such as cigarettes, more often than in other cases. Why?  

Answer 1

Part-1)

1) Since income elasticity for wheat, between zero and one, thus indicates it to be a normal good; thus the wheat's demand will rise over time as incomes increases

2) As wheat is a normal good, thus there will be an increase in quantity of wheat purchased by consumers however will not rise very much as the elasticity is so low

3) The consumer budgets percentage spent on wheat and other staple goods is likely to decrease because we are given that the income elasticity is between 0 and 1, thus the rise in income exceeds the percentage increase in demand for wheat

4) Farmers will be relatively worse off because the demand for what they are selling will not be increasing rapidly compared to the demand for other goods that they are very likely to buy

Part-2)

Governments impose excise taxes on goods which have inelastic demand such as cigarettes and other tobacco product. Perfectly inelastic means when the quantity supplied or demanded is unaffected by any change in price. The demander bear the larger share of the burden of a tax placed on cigarettes because the more inelastic the demand curve, the larger will be the percentage of the burden is borne by the demander thus helps the government to collect additional revenue and also deter consumption of tobacco product