The price elasticity of demand for soft drinks has been estimated to be 0.55.If the government enacts a major increase in the tax on imported sugar (a major ingredient in soft drink manufacturing) ,how will that affect total expenditures on soft drinks,all other things equal?

A) Total expenditures will remain unchanged.
B) Total expenditures will fall.
C) Total expenditures will rise.
D) People will buy Pepsi instead of Coke.

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sarin saththijesvaran · Accepted Answer

Final Answer : C, Explanation :  Since the price elasticity of demand for soft drinks is 0.55, which is inelastic (less than 1), an increase in the price due to a higher tax on imported sugar will lead to a smaller percentage decrease in quantity demanded. Therefore, total expenditures on soft drinks (price times quantity) will rise, as the increase in price outweighs the decrease in quantity demanded.

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