Policy Analysis 5

Read the article on alcohol elasticity. (You'll probably want to use the
currency converter link also.) Explain why, in order to determine whether
lowering the tax on beer will raise or lower total revenue to the
government, the following elasticities are important: the price elasticity
of demand for beer and the cross-price elasticity of dmeand for wine with
respect to the price of beer. From the information in Table 3 in the
article, for which good (beer, spirits, or wine) is demand most price
responsive? Least price responsive? For each good (the most and least price
responsive), predict the resulting percentage change in quantity demanded in
response to a 5\% decrease in price. According to Table 4 in the article, a
reduction in the wine tax will lead to an increase in total wine sales.
Refer to the appropriate elasticity from Table 3 to explain why. Use the
information in Table 3 to determine whether beer and wine are substitutes or
complements. Explain your answer. What does this imply about how tax revenue
from beer sales will change if there is a decrease in the wine tax? Explain.