Question

Given the following information, calculate the price elasticity of demand and use it to project how the consumer's quantity demanded and expenditure will change in response to a future price increase. Conclude by identifying what your findings suggest about how effective taxing this good would be for a government trying to raise revenue or change behavior. % change (growth rate) = (value new - value old) / value oldElasticity = |% change in quantity / % change in price| Milk Year 1 Year 2 Price $3.00 $3.87 Quantity 46.60 39.79 For the following questions, assume that the Year 2 price increases by an additional 10%.

6. What would be the new Year 2 price after the additional price increase?

7. Given the previously calculated price elasticity of demand, what quantity would the consumer purchase in Year 2 after the price increase?

8. What would be the consumer's expenditure in Year 2 after the price increase?

9. What is the change in the consumer's expenditure between Year 1 and Year 2?

Answer 1