Question

6. Suppose two consumers have the following demand for cigarettes (measured in cigarettes per week) Quantity Demanded (Consumer Quantity Demanded (Consumer Price A) B) $2.00 154 210 2.50 147 175 3.00 140 140 3.50 133 105 As the price of cigarettes rises from $2.50 to $3.00, what is the price elasticity of demand for (i) consumer A and (ii) consumer B? Is consumer A's elasticity of demand elastic or inelastic? Is consumer B's elasticity of a) b) demand elastic or inelastic? Jerry is 16 years old and is experimenting with cigarettes. Jerry's not addicted yet c) but when he doesn't have anything better to do, he enjoys getting with friends and smoking. Aunt Betty has been smoking for years. She doesn't really enjoy smoking anymore, but she's addicted and has trouble stopping. According to the elasticities you calculated in part a, which statement is more likely to be true: 1) 2) Jerry is Consumer A and Aunt Betty is Consumer B Jerry is Consumer B and Aunt Betty is Consumer A Explain your reasoning

Answer 1

a) i) Price elasticity = [140-147/(140+147/2)] / [3-2.5/(3+2.5/2)] = [7/143.5]/[0.5/2.75] = 0.04878/0.1818 = 0.27

ii) Price elasticity = [140-175/(140+175/2)] / 0.1818 = [35/157.5]/0.18181 = 0.2222/0.1818 = 1.2

b) Consumer's A demand is inelastic

Consumer's B demand is elastic

c) Aunt betty demand is inelastic as she cannot change her habits so she is Consumer A and Jerry is consumer B as his demand is elastic

option(2)