Assume the demand for milk is given by the equation Qd=1200-200P, and the supply of milk is perfectly elastic at P=$2. Also assume that the demand for champagne is given by the equation Qd=1100-12P and the supply of champagne is perfectly elastic at P = $50.

(a) Calculate the price-elasticity of demand coefficients for milk and for champagne and determine whether the demand for each is relatively elastic or relatively inelastic.

(b) Assume champagne is taxed at the rate of 5% and the tax rate on milk is set according to the inverse-elasticity version of the Ramsey Rule. Calculate the tax rate on milk and the deadweight loss in each market.

(c) Does adherence to the Ramsey Rule result in minimum deadweight loss? Explain.

(d) Luxury goods often have much higher elasticities of demand than do staple goods like basic foods and clothing that are purchased by a broad base of people. Why then, are governments more likely to tax luxuries than staple goods?