Reference no: EM131631648

Elasticity of Demand for Cigarettes

a. In 1999 Governor Glendening of Maryland proposed an increase of $1 per package in Maryland's cigarette tax, which would increase the price per package of cigarettes from $2.55 to $3.55. An estimate of the own-price elasticity of demand for cigarettes in Maryland at the time was -0.4. How much would the quantity demanded for cigarettes decline as a result of the price increase? (Note: Use $2.55 as the base price.)

b. According to a Wall Street Journal article on April 24, 2017 ("Tobacco's Surprise Rebound"), the number of cigarettes sold in the U.S. has been dropping steadily since the early 2000s while the price has risen. Using data presented in the article, we have the following information about quantity sold and price of cigarettes in the U.S. market: In 2008, the quantity sold was 19 billion packs of cigarettes and the price was $4.20 per pack; in 2015, there were 14 billion packs sold and the price was $6.20 per pack. (Note that these numbers are approximate and have been rounded for ease of calculation.) 

i. Calculate the own-price elasticity of demand, using the 2008 price and quantity figures as the base. 

ii. The article stated that over the same period that tobacco companies raised prices, total revenue went up substantially. Given your elasticity answer, does this make economic sense? Provide a brief explanation based on economic reasoning. 

c. Most statistical estimates of the elasticity of demand for cigarettes for teenagers range from -0.7 to -1.4. Consider the different factors that affect the price elasticity of demand. Name two factors that you think makes teenage demand for cigarettes more elastic than demand by adults. Briefly explain your answer in one or two sentences.