Question

Section 3: Descriptive question 14. The UAE government placed a tax of AED 10 per pack of Cigarettes. After a year now, while the price of cigarettes for consumers has increased significantly, the quantity demand of it has reduced very slightly. 1) Is the demand for cigarettes, over the given period, price elastic or price inelastic? Explain. (2) ii) Suppose you are in-charge of pricing for a tobacco firm. The chief executive of your firm suggests that the evidence received over the last month demonstrates that the cigarette industry (all firms/brands) should get together and raise the price of cigarettes further in order to raise the total revenue of the tobacco industry. Is your Boss correct? Explain? (3)

you have to do both of them as they sre related

Answer 1

14) i The demand for ugarettes over the given period is price inelastic because even if the price has increased the quantity demanded of the cigarette has reduced very slightly le change in quant is less compared to change in price. Price Inelastic goods has steepedt demand are Price f o melastic U elastic . Di. Voor anantity for elastic quantity changes from g to go for the same price change compared to change from q to go in inelastic demand case. ii) Yes, the Boss is correct in saying that increasing the price will increase the revenue. It is because the decantity will not fall by much due to this change. but changing more price for each cigarette will fetch them more revenue. In above graph Area of P'В qo o 7 Area of Pago Revenue from increased price Revenue from initial price