A consumer spends his income on food and rent. The government places a $1 tax on food. To restore the pre-tax consumption level of food the rebate paid to consumers will be smallest when

Question

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The smaller the rebate paid to consumers, the more inelastic the demand for food must be. In this case, a lower income elasticity of demand for food (option C) would mean that a smaller rebate would be needed to restore pre-tax consumption levels, as the demand for food would be less sensitive to changes in income. A higher own price elasticity of demand for food (option C) would also make the demand for food more sensitive to changes in price, meaning consumers would be more likely to reduce their consumption in response to the tax, making a smaller rebate needed to restore pre-tax consumption levels.

A Consumer Spends His Income on Food and Rent