Question

Suppose you are reading an economics paper published in an economics journal that contains the following table: Dependent variable: packs price - 1.449 income (0.377) 0.123 (0.252) 4.549" (1.168) Constant Observations 34 0.353 Note: ***p<0.01: *p<0.05;*:p<0.1 R2 where packs refers to the logarithm of the number of packs of cigarettes smoked per year, price is the logarithm of the price of a pack of cigarettes, and income is the logarithm of income. Suppose the government institutes a 5% ad-valorem tax on cigarettes (the price of each pack would increase by 5%). According to the model, by what percentage would we expect the number of packs of cigarettes smoked to decrease? (The question is asking about the decrease in consumption, so your answer should be a positive number). Round your answer to two decimal places.

Answer 1

Based on the regression results, the model can be framed as below:

Log pack = 4.549 + 0.123 log income - 1.449 log price

This means, a 1% change in price will lead to a -1.449% fall in demand for cigarettes.

This means, an increase in the price of cigarettes by 5% will lead to a (1.449 x 5) = 7.245% fall in demand for cigarettes.