Question

Suppose consumers buy 50 million packs of cigarettes per month at a price of $8 per pack. If a $2 tax is added to that price Consumers buy 50 million packs of cigarettes Instructions: Enter your responses as a percentage rounded to one decimal place. a. By what percentage does the price change? percent b. By what percentage will cigarette sales decline in the short run? (See table below for a clue.) Product Price Elasticity 24 2.3 22 1.2-15 1.1 1.2 Relatively elastic (E > 1) Airline travel, long run Restaurant meals Fresh fish New cars, short run Unitary elastic (E = 1) Private education Radios and televisions Shoes Movies Relatively inelastic (E< 1) Mulk Cigarettes Coffee Eggs Gasoline, short run Electricity (in homes) 0.9 0.9 0.6 0.4 0.3 0.3 0.2 0.1 percent c. Refer to the article to answer the final question.

Answer 1

a) The initial price of cigarettes is $6 a pack.

After the tax, the new price becomes $8 a pack.

Percentage change = [(8-6) / 6] x 100

In percentage terms, this is a 33.33% change in the price.

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b) As per the data, the price elasticity of cigarettes is 0.4

Now, Ep = % change in Qd / % change in P

Therefore,

0.4 = % change in Qd / 0.3333

Thus,

% change in Qd = Decline in sales = 0.1333 = 13.33%

Thus due to the price increase, sales decrease by 13.33%