Assignment: Principles of Economics for Accountants

Article: "Why the government should tax unhealthy foods and subsidise nutritious ones."by Linda Cobiac, Lennert Veerman and Tony Blakely.

Access the article at the URL given above and answer the questions in the spaces below. Use full sentences and show all necessary working. Other references are not necessary but, if you do use any (for example,online economics glossaries) please list the URL of your source.

1) In this research the authors claim that "by taxing unhealthy foods and subsiding healthy foods" consumers will shift their preferences towards healthier goods. Use the simple demand and supply diagrams below to illustrate and explain the changes in CS, PS and Government revenue if

a) a tax was imposed on unhealthy foods;

b) A subsidy was given to healthy foods.

(2) The limitations of this simulation studyare the estimation of the "responsiveness to the public to changes in food prices". Explain in your own wordswhat this means in terms of the concept of elasticity, illustrating your answers with straight line demand schedulesin two cases; when the elasticity of demand is

a) relatively inelastic and b) relatively elastic.