Question

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

1a. As incomes rise over time, what will happen to the demand for wheat?

1b. What will happen to the quantity of wheat purchased by consumers?

1c. What will happen to the percentage of their budgets that consumers spend on wheat?

1d. 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

1) The income elasticity of wheat is between o and 1 so the income elasticity is positive and inelastic

a) As income increases, the demand for wheat will increase as the income elasticity is positive but the increase in demand is less than proportionate change in income because it is inelastic so the increase would be almost negligible.

b) Quantity of wheat purchased by consumers will increase because the demand has increased

c) Percentage of their budget on wheat consumption will decrease as 1% change in income will increase the demand for wheat for less than 1% and more expenditure would be made on other goods

d) The farmers are not likely to be better off or worse off as the wheat being an essential and having inelastic demand, the quantity demanded is not enough to cause a change in their surplus