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. 10% increase in price definitely leads to decline in the demand of cigarettes, the price elasticity is 30% means if the price increased by 10% the demand can be decreased by30% approximately b. if the consumer income is doubled, the impact is the demand for cagars is going to be increased by 50% more .

1. 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. 10% increase in price definitely leads to decline in the demand of cigarettes, the price
elasticity is 30% means if the price increased by 10% the demand can be decreased by30%
approximately
b. if the consumer income is doubled, the impact is the demand for cagars is going to be
increased by 50% more