Question

#7

durucuS DIU LUISLUCILU! quantities are available for import into the United States at this price. The US domestic supply and demand for various price levels are shown as follows: PRICE U.S. SUPPLY (MILLION LBS) U.S. DEMAND (MILLION LBS) 7. In 2010, Americans smoked 315 billion cigarettes, or 15.75 billion packs of cigarettes. The average retail price (including taxes) was about $5.00 per pack. Statistical studies have shown that the price elasticity of demand is -0.4, and the price elasticity of supply is 0.5. a. Using this information, derive linear demand and supply curves for the cigarette market. b. In 1998, Americans smoked 23.5 billion packs of cigarettes, and the retail price was about $2.00 per pack. The decline in cigarette consumption from 1998 to 2010 was due in part to greater pub- lic awareness of the health hazards from smok- ing, but was also due in part to the increase in price. Suppose that the entire decline was due to the 28 22 10 15 18 10 12 CHAPTER 2. The Basics of Supply and Demand 63 increase in price. What could you deduce from that about the price elasticity of demand? that instead of a decline in supply, OPEC produc- don increases by 2 billion barrels per year (bby

Answer 1

o Price elasticity of demand for cigaretted in America is -0.4. Price elasticity of cigarettes demand = 1 change in demand Price elasticty of cagarette for all l. change in price Let wl aliune b=de OP ed- ob. f. 5 2) b = -(0.4) (15.75) L 16-1.26 ez atbp Gerrel egustin of domond) -15:15-9-1-26 (5) +6.3 a. 15.75 14: 22.05 :) a = 22.05-1.26 P (Demend eguahu) Price eleutianty of Supply for cigarettes in America is 0.5. Price castinty of supply of cigarettes et change in Supply .) change in price I let us estime da je i

- des d. (1) 5 d = (0.5) (15.15) 1d = 1.515 - Genul egration of Supply) o= c+de 15.75= ct 1.575 (5) C = 15.75 - 7.355 c = 7,875 0 = 7.875 +1.515P (Supply equation, It is mentioned that American Smoked 23.5 billion pack cigarettes in 1998 when price was $2 perpark and in 2010 price was $5 per pack and grenbly of cigarettes smoked was 15.75 billion. + 21-1 It is stated that enhre decline in cigarette demand is due to price increase It mean price elasticity of demand is greater than one- It impie, demond for cigarettes is price elastic.