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.
Please show steps in achieving the answer.
Thanks
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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