The U.S. Department of Agriculture (USDA) has been concerned that Americans aren’t eating enough fruits and vegetables, and they’ve considered coupons and other subsidies to encourage people—especially lower-income people—to eat these healthier foods. Of course, if people’s demand for fruits and vegetables is perfectly inelastic, then there’s no point in giving out coupons (thought question: why?) If instead the demand is only somewhat elastic, there may be better ways to spend taxpayer dollars.
This is clearly a situation where you’d want to know the elasticity of fruit and vegetable demand: If people respond a lot to small changes in price, then government-funded fruit and vegetable coupons could make poorer Americans a lot healthier, which might save taxpayers money if they don’t have to pay for expensive medical treatments for unhealthy eaters. There are a lot of links in this chain of reasoning—all of which are covered in more advanced economics courses—but the first link is whether people actually have elastic demand for fruits and vegetables. The USDA’s Economic Research Service employs economists to answer these sorts of questions, and a recent report contained the following estimated elasticities.
FruitElasticity of Demand
Apple …………………….-0.16
Banana ……………………-0.42
Grapefruit ………………..-1.02
Grapes …………………… -0.9
Orange ……………………-1.14
a. Based on these demand elasticity estimates, which fruit is most inelastically demanded? Which is most elastically demanded?
b. For which of these fruits would a 10% drop in price cause an increase in total revenue from that sale of that fruit?
c. If the government could offer “10% off” coupons for only three of these fruits, and it wanted to have the biggest possible effect on quantity demanded, which three fruits should get the coupons?
d. Overall, the authors found that for the average fruit, the elasticity of demand was about -0.5. Is the demand for fruit elastic or inelastic?