After implementing small scale experiments with both taxes they estimate that price elasticity of demand for soda is 1.4 and 0.4 for high-calorie snack foods. Assume that the Mexican Government wants to collect as much revenue as possible and only has the resources to tax either soda or high-calorie snack foods. Which one will the Mexican Government choose to tax? Why?

A  If the goal is to raise as much revenue as possible the Mexican Government would choose to tax high-calorie snack foods because the price elasticity of demand is less than soda.  This means that consumers of high-calorie snack foods are not as price sensitive compared to soda consumers.  Thus, if taxed, their reduction in consumption will be less than their soda counterpart’s reduction in consumption.

B  If the goal is to raise as much revenue as possible the Mexican Government would choose to tax high-calorie snack foods because the price elasticity of demand is greater than soda. This means that consumers of high-calorie snack foods are much more price sensitive compared to soda consumers. Thus, if taxed, their reduction in consumption will be greater than their soda counterpart’s reduction in consumption.

C  The Mexican government will choose to tax soda because its price elasticity of demand is greater than the price elasticity of demand for high-calorie snack foods.

D  The Mexican Government will choose to tax soda because soda is always elastic.