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Determining the change in demand

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Suppose that 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 percent. Calculate by how much the demand for cigarettes will change (a) in the short run, and (b) in the long run.

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Solution Summary

Solution describes the steps to determine the change in demand in response to the given changes in parameter values.

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a. In the short run

Change in demand=(1+price elasticity of demand in short run *change in price)*(1+income elasticity of demand*change in income)*(1+cross price elasticity )-1

Solution provided by:
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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