Show Given, demand elasticity for cigarettes is -0.45 and quantity demanded is 18 billion. We know, Price elasticity of demand is the change in QD(quantity demanded) of a commodity due to an changes in price(p). It is the ratio between the percentage(%) change in QD (quantity demanded) and the percentage(%) change in price(p). It is calculated as: e = - (dq/q)/(dp/p) Where e is price elasticity of demand, p is price and q is quantity demanded a) Given that taxes imposed raise prices by 40%, the percentage change in price is 40. As dp/p signifies the percentage change in price, we have dp/p = 40. Thus we get, e = - (dq/q)/(dp/p) Or, -0.45= - (dq/q)/40 Or, dq/q= 0.45*40= 18 Hence the percentage change in QD(quantity demanded) is 18%. Since change in QD (quantity demanded) is inversely related to change in price(p), a 40% rise in prices will decrease QD(quantity demanded) by 18%. Given that initial quantity demanded was 18 billion, the fall in quantity demanded is: 18/100*18 billion = 3.24 billion The new quantity demanded is 18 billion-3.24 billion = 14.76 billion Hence the new quantity demanded of cigarettes is 14.76 billion. – b) With a demand curve DD and supply curve SS such that price is mapped on the vertical axis and quantity on the horizontal axis, a rise in taxes will raise input costs and reduce producer profits. So they will reduce supply of cigarettes at every price level and as a result, the supply curve will shift to the left. A highly elastic demand curve is flatter as a percentage rise in price reduces quantity demanded in a proportionately larger amount. In this case, the price rises as SS intersects DD to the left of the initial equilibrium E0 at a new equilibrium E1 with a higher price level by virtue of the negative slope of the DD curve. The price rise due to the fall in supply will decrease equilibrium quantity in a proportionately greater amount. The tax burden will fall more disproportionately on the producers as consumers respond to price rises by reducing consumption in a proportionately greater amount, hence producers have to bear most of the burden themselves. On the other hand, if demand is inelastic, a percentage rise in price will reduce quantity demanded in a proportionately lesser amount and the demand curve will be steeper. The SS curve will shift to the left and intersect DD such that the rise in price is much greater than the fall in equilibrium quantity.The tax burden is borne in a greater proportion by the consumers because they barely respond to price changes by reducing consumption and hence have to bear the tax to satisfy their demand It is clear that the rise in taxes will be much more effective when the demand is highly elastic as compared to highly inelastic demand, since a similar rise in taxes will bring about a higher decline in quantity demanded of cigarettes in the case of elastic demand. Note - We currently do not have a feature to support diagrams/graphs and will be updating soon. We tried to answer the question as best as possible explaining the concepts behind the question. A legal maximum on the price at which a good can be sold what does a price celling create
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shortage no higher than $5 Lost consumer surplus A legal minimum on the price at which a good can be sold 3 intended objective of taxes 1. Health objective A reduction in the total surplus that results from a market distortion such as a tax or a monopoly price 3 insights concerning market outcomes 1. Free markets allocate the supply of goods to the buyers
who value them most highly, as measured by their willingness to pay. Because the equilibrium outcome is an efficient allocation of resources, the social planner can leave the market outcome as he/she finds it. The price of a good that prevails in the world market for that good draw effects of tariff on graph - Jobs argument – short term willingness to pay formula Willingness to pay = Consumer Surplus + Pay Consumer surplus = Willingness to Pay – Paid Understand all this weeks graphs Consumer surplus = Willingness to Pay – Paid Price elasticity of demand: Define and distinguish between price elasticity of demand and income elasticity of demand. Explain factors that determine each. Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good, calculated as the percentage change in quantity demanded divided by the percentage change in price. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a packet of cigarettes currently costs $8 and the government wants to reduce smoking by 20 percent, by how much should it increase the price? First, we obtain the necessary percentage change in price, and then use this to calculate the absolute change in price. The government would increase the price by 50% in order to reduce smoking by 20%. As the current price is $8, a 50% increase is $4, so the price increases to $12. On an exam or in the assignment, this suffices. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or five years from now? The time horizon is positively correlated with the elasticity; the longer the period, the easier it is for consumers to adjust or make substitutes. Thus, the effect is likely to be larger five years hence than one year hence. Studies also find that teenagers have a higher price elasticity than do adults. Why might this be true? On one graph, show the demands for a typical adult smoker and a typical teenage smoker that are consistent with this observation. Teenagers generally have a smaller income. Because they
are limited in where they can licitly smoke, they tend to be more casual and more easily switch between smoking cigarettes and consuming other substances. Alternatively, it is plausible that teenagers have lower demand than adults, which could be depicted as an inward shift. If the shift were parallel, then the same price change results in the same absolute change in quantity; because the base of the inner demand curve is smaller, this same absolute change is a larger percentage change in quantity demanded, which is then consistent with greater elasticity. Thus, the typical teenager's demand curve could be either demand curve below in blue or dark blue. Note that the prices are 6 and 8, and for the adult, the quantities are Q0 and Qa, whereas those for the teens are either Q0` and Q1`, or Q0 and Qt1. Look at one teen demand at a time: for the blue demand, note that Q1t`-Q0t`=Q1a-Q0, but the teen's base is smaller and so the percentage change in quantity is larger; therefore, greater elasticity. For the dark blue demand, note that Q1t-Q0 > Q1a - Q0 and so the percentage change in quantity is larger (the "base" quantity rises 0.5 units for each unit that the change rises); therefore, greater elasticity. Two drivers – Tom and Jerry – each drive up to a petrol station. Before looking at the price, each places an order. Tom says: “I’d like 10 litres of petrol.” Jerry says: “I’d like $10 of petrol.” What is each driver’s price elasticity of demand? Tom’s price elasticity of demand is zero, since he wants the same quantity regardless of the price. Jerry’s price elasticity of demand is one, since he spends the same amount on gas, no matter what the price, which means his percentage change in quantity is equal to the percentage change in price. 8: Economists have observed that spending on restaurant meals declines more during economic downturns than does spending on food to be eaten at home. How might the concept of elasticity help to explain this phenomenon? To explain the observation that spending on restaurant meals declines more during economic downturns than does spending on food to be eaten at home, economists look at the income elasticity of demand. In economic downturns, people have lower income. To explain the observation, the income elasticity of restaurant meals must be larger than the income elasticity of spending on food to be eaten at home. What does a price elasticity of 0.4 mean?So as consumers' income rises more is demanded at each price. 1. Normal necessities have an income elasticity of demand of between 0 and +1 for example, if income increases by 10% and the demand for fresh fruit increases by 4% then the income elasticity is +0.4. Demand is rising less than proportionately to income.
Is 0.46 elastic or inelastic?0166/. 0358) = 0.46. Since elasticity is less than one, demand is inelastic. When demand is inelastic, an increase in price causes total revenue to rise.
What is the elasticity of demand for cigarettes with respect to price?The researchers estimate that the total price elasticity of demand for cigarettes is -0.71. A 10% increase in the price of cigarettes would reduce smoking by 7.1 percent, meaning that cigarette demand is inelastic.
Is 0.5 price elastic or inelastic?A score between 0 and 1 is considered inelastic, since variation in price has only a small impact on demand. A product with an elasticity of 0 would be considered perfectly inelastic, because price changes have no impact on demand.
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If the elasticity of demand for cigarettes is 0.4, then an increase in the price
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