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Week 3 Assignment: Elasticity of Demand

Week 3 Assignment: Elasticity of Demand

In November 2014, Berkeley, California became the first city in the United States to pass a soda tax, implementing a penny-per-ounce tax on sugar-sweetened beverages (Isidore, 2014). The tax resulted in a 21 percent decline in consumption of soda and other sweetened beverages in Berkeley’s low-income neighborhoods. Taxed beverages included Coca Cola, Sprite, Red Bull, and Arizona Iced Tea. Berkeley residents reported increasing their bottled and tap water consumption by 63 percent. Isidore (2014) indicated this to be an “excise tax,” paid by sugary drink distributors and reflected in shelf prices.

According to Kaplan (2016), three months after the soda tax was launched, 47 percent of the penny-per-ounce tax on sugar-sweetened beverages was passed along to consumers; and for soda, 69 percent of the tax was passed along to consumers in the form of higher prices. Kaplan’s report estimated that the tax added about $0.12 to the price of a can of soda, and $0.68 to the price of a two-liter bottle.

Instructions

Research the issue further by obtaining one or more articles from the WCU online library and the Internet. Then, respond to the following in a one- to two-page paper in APA Style.

• Use the information in the article you found in your research to estimate the cross elasticity of demand for water with respect to the price of sugar-sweetened drinks.
• How does the total revenue test work for a rise in price? What do you predict happened to total revenue from sugar-sweetened drinks when the tax was imposed on them? Explain your response.
• Would you expect the elasticity of demand for Coke, Gatorade, Red Bull, or Hawaiian Punch to be the same as the elasticity of demand for sugar-sweetened drinks? Explain why or why not.
• Discuss what other cities have done (e.g., New York) and explain how the market reacted and why.

Isidore, C. (2014, November 5). New Berkeley soda tax costs 68 cents per two liter bottle. Retrieved from https://money.cnn.com/2014/11/05/news/economy/berkeley-soda-tax/index.html

Kaplan, K. (2016, August 23). Berkeley sees a big drop in soda consumption after penny-per-ounce "soda tax." Retrieved from https://www.latimes.com/science/sciencenow/la-sci-sn-soda-tax-works-20160823-snap-story.html

 

 Our Exper`s Response:

Estimating the cross elasticity of demand for water with respect to the price of sugar-sweetened drinks requires information on consumer behavior in response to changes in the price of sugar-sweetened drinks and its impact on the demand for water.

The cross elasticity of demand formula is:

In this case, let`s say X is water and Y is sugar-sweetened drinks.

1. Data Collection: You would need data on changes in the price of sugar-sweetened drinks and the corresponding changes in the quantity demanded of water.

2. Calculate Percentage Changes: Compute the percentage change in the quantity demanded of water and the percentage change in the price of sugar-sweetened drinks.

3. Apply the Formula: Substitute the percentage changes into the formula to get the cross elasticity of demand.

4. Interpretation: If the cross elasticity is positive, it implies that water is a substitute for sugar-sweetened drinks. If it`s negative, it suggests they are complements.

It`s worth noting that cross elasticities can vary over time and across different markets. Additionally, the availability of substitutes, consumer preferences, and other factors can influence the results. It`s advisable to conduct empirical studies or analyze existing data to obtain more accurate estimates for a specific context