Question

A study of cigarette smokers showed that a one percent price increases caused the consumption of cigarettes to decrease 0.4 percent in the short run, and 0.75 percent in the long run.

a. What are the short and long-run elasticities of demand for cigarettes?

b. Is demand more or less elastic in the short run relative to the long run? Explain.

c. Suppose the price of cigarettes were to increase ten percent. By what percentage would demand decrease in the short run? By how much would it decrease in the long run?

d. If the government were to impose a 5% tax on the sale of each pack of cigarettes, would total consumer expenditure on cigarettes increase or decrease in the short run? What about in the long run? Explain.

Answer 1

a) IN the short run the elasticity of the demand is 0.4 /1 = 0.4 and in the long run the elasticity will be 0.75.

b) The demand is less elastic in the short run relative to the long run. because in the short run people in the market do not have much options but in the long run there are many substitute of smoking are available that will make the good inelastic.

c) IN the short run the demand for the cigarettes will increase by 4% and in the long run it will increase by 7.5%.

d) in the short run as the demand is very inelastic the total expenditure of the consumer will increase by close to 5% and in the long run it will also increase as the demand is still inelastic but not as much as in the short run.