6.According to studies undertaken by the Department of Agriculture, the price elasticity of
demand for cigarettes is approximately -0.3 and the income elasticity is approximately 0.5.
a. What effect would a 10% increase in the price of cigarettes due to increased cigarette taxes
have on cigarette consumption and consumer spending on cigarettes?
b. If consumer incomes are expected to double over the next decade, what impact would this
have on cigarette sales?
Solution
a. Price Elasticity of Demand= % Change in Quantity demanded / % Change in Price
Price Elasticity =-0.3
-0.3 = X / 0.10
X = -0.03
Effect on Consumer Spending due to Change in Price = Spending will be decreased by 3%
b. Income Elasticity of Demand = % Change in Quantity Demanded / % Change in Income
0.5 = X / 1
% Change in Quantity Demanded will be = 50%
So, if Income gets double than the demand will increase by 50%.