Suppose the price elasticity of demand for cigarettes is - 0.46 in the short run and -1.89 in the long run, the income elasticity of demand for cigarettes is 0.50 and the cross-price elasticity of demand between cigarettes and alcohol is -0.70 Suppose also that the price of cigarettes, the income of consumers, and the price of alcohol all increase by 10 %. Calculate by how much the demand for cigarettes will change in the (a) short run and (b) long run.
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Solution Preview
Suppose the current demand is Q:
In short run:
Percentage Change in demand due to 10% increase in price = Price elasticity of demand*Change in price = -0.46*10%
=-4.6%
Percentage Change in demand due to 10% increase in Income = Income elasticity of demand*Change in Income
= ...
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