5. Taxes and the impact on relative price In her school\'s food court, Sandi not

Question

5. Taxes and the impact on relative price In her school's food court, Sandi notices that a cup of yogurt costs $3.00 and a bag of chips costs $2.00. Since Sandi just finished studying for an economics exam, she immediately calculates that the relative price of a cup of yogurt is per Suppose that school administrators want to encourage healthy choices and decide to impose a s0.75 price increase on bags of chips. Given that the absolute price of a cup of yogurt is unchanged, the relative price of a cup of yogurt

Explanation / Answer

Ans.

The relative price is ratio of prices of two commodities. So relative price of a cup of yogurt is 3/2 = 1.5 bag of chips per cup of yogurt.

There is tax on bag of chips , so price of chips increases from $2.00 to $2.00 + $ 0.75 = $2.75. Such that relative price of cup of yogurt will be 3 / 2.75 = 1.09

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