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    Calculating changes 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%. Calculate by how much the demand for cigarettes will change (a) in the short-run and (b) int the long-run.

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    1. 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 Summary

    Solution describes the steps needed to predict the change in demand based upon given elasticities and variations in several parameters.