Assume there are two types of food: Fast and Slow. Slow food is food that takes a lot of time and energy to prepare, and is possibly more "authentic." Determine it a high-end luxury good. All other food we'll call fast. It's a staple needed to live, is quick to acquire and cheap. The price elasticity of demand for slow food is -2.8. The price elasticity of demand for fast food is -.20. The slow food costs $20 per unit, while the fast food costs $5 per unit. The government is considering a tax on food. The tax on slow food is denoted ts, and the tax on fast food is denoted tf.
1. Comment on the significance of the different elasticity of demand?
2. Determine the equation for the optimal value of ts in terms of tf.
3. In a clearly written paragraph, comment on the relative size of ts compared to tf, and why we are seeing this result.
4. Assume the government has selected tax levels ts and tf using the Ramsey rule. Furthermore, at those taxes, the market sells 3 million units of slow food and 300 million units of fast food. The government collects $1 billion in revenue from these taxes. Calculate the values of th and tp?