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6 According to studies undertaken by the Department of Agriculture,

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6.According to studies undertaken by the Department of
Agriculture, the price elasticity of demand for cigarettes is
approximately -0.3 and the income elasticity is
approximately 0.5.
a. What effect would a 10% increase in the price of
cigarettes due to increased cigarette taxes have on
cigarette consumption and consumer spending on
cigarettes?
b. If consumer incomes are expected to double over the
next decade, what impact would this have on cigarette
sales?
Solution
a. Price Elasticity of Demand= % Change in Quantity
demanded / % Change in Price
Price Elasticity =-0.3
-0.3 = X / 0.10
X = -0.03
Effect on Consumer Spending due to Change in Price =
Spending will be decreased by 3%
b. Income Elasticity of Demand = % Change in Quantity
Demanded / % Change in Income
0.5 = X / 1
% Change in Quantity Demanded will be = 50%

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6.According to studies undertaken by the Department of Agriculture, the price elasticity of demand for cigarettes is approximately -0.3 and the income elasticity is approximately 0.5. a. What effect would a 10% increase in the price of cigarettes due to increased cigarette taxes have on cigarette consumption and consumer spending on cigarettes? b. If consumer incomes are expected to double over the next decade, what impact would this have on cigarette sales? Solution a. Price Elasticity of Demand= % Change in Quantity demanded / % Change in Price Price Elasticity =-0.3 -0.3 = X / 0.10 X = -0 ...
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