Country Z produces and consumes only two products: rice and wheat. The price elasticity of demand of

rice is Ed = 0.2 = 0.2 and the price elasticity of demand of wheat is Ed = 1.2 = 1.2

a) What information can we obtain about the preferences of buyers of country Z from the given price

elasticities of demand? Discuss briefly.

b) Note: the following question is similar to the example we saw last Saturday (29 September).

The government of country Z needs a significant amount of fund to tackle the current coronavirus

situation. To obtain the fund, they have decided to impose a $ 5 tax on either the sellers of rice or the

sellers of wheat. Currently, both the equilibrium prices of wheat and rice are $20 per unit respectively.

The equilibrium quantities of wheat and rice are 10,000 units (per day) respectively.

As the economic advisor of country Z, what would you advise the government of country Z. Which

product should they tax to obtain the fund to tackle the coronavirus situation? Discuss in detail using the

Model of Demand and Supply (graphs).