1. Suppose the income elasticity of demand for food is 0.5 and the price elasticity ofdemand is 1.0.Suppose also that you spend $10,000 a year on food, the price of food is $2, and that your income is $25,000.

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)?

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?