Economists estimates of price elasticities can differ somewhat, depending on the

Question

Economists estimates of price elasticities can differ somewhat, depending on the Sime period and on the markets in which the price and quanility dala used in the estimates were gathered. An artide in the New York Times contained the following statement from the Centers for Disease Control and Prevention A 10 percent increase in the price of dgaretes reduces consumption by 3 to 5 percent Given this information, compute the range of price elasscity of demand for cigaretles Source: Shaila Dewan, "States Look at Tobacco to Balance the Budget," New York Times, March 20, 2009 According to the arsche, the price olastichy ofden and for dgrene far ges t om -lo.it end elthe range n abso devue)to Explain whether the demand for cigarettes is elastic, inelastic, or unit elastc The price elasticties in this range A. are inelastic because they are less than one (in absolute value) idv ye·mp ebbede B. are inelastic because they are less than zero OC. are elastic because they are less than zero O D. are unit- elastic because they are less than one (in absolute value) OE. are inelastic ding a portion one range and elastic during a portion of the range f cigarette manufacturers raise prices, will their revenue increase or decrease? Briedly explain

Explanation / Answer

PE = percent change in consumption/percent change in price

The price elasticity of demand for cigarettes ranges from to 0.3 to 0.5

Dmeand is inelastic in this range.

1)

Option A is correct (abs (PE) < 1)

2)

Option C is correct (Total revenue increases because % change in price will be greater than % change in quantity)

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