2. Suppose the income elasticity of demand for food is 0.5 and the price elasticity of demand is -1.0. Suppose also that you spends $10,000 a year on food, the price of food is $2, and that your income is $25,000. (15 marks). a. If a sales tax on food caused the price of food to increase to $2.50, what would happen to your consumption of food (i.e. how many units of food do you consume)? (Hint: Because a large price change is involved, you should assume that the price elasticity measures an arc elasticity, rather than a point elasticity and so use the midpoint formula). (5 marks) b. Suppose that you gets a tax rebate of $2500 to ease the effect of the sales tax. What is your consumption of food now? (5 marks). c. Are you better or worse off when given a rebate equal to the sales tax payments? Draw a graph and explain. (Note: your graph should indicate the numerical values on the horizontal and vertical axis for before tax budget line (BL), after tax BL, after tax plus rebate BL, initial consumption choice when $10000 is spent on food and the new food consumption you found in part (b)). (5 marks) All other Goods ($) Food