9. Because of a legal settlement over state health care claims, in 1999 the U. S. tobacco companies had to raise the average price of a pack of cigarettes from $1.95 to $2.45. The decline in cigarette sales was estimated at 8 percent. What does this imply for the elasticity of demand for cigarettes

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Business

Agustin Caldwell

19 July, 14:39

9. Because of a legal settlement over state health care claims, in 1999 the U. S. tobacco companies had to raise the average price of a pack of cigarettes from $1.95 to $2.45. The decline in cigarette sales was estimated at 8 percent. What does this imply for the elasticity of demand for cigarettes

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Malcolm Mccann · Answer 1

As the elasticity of demand is lower than 1, so it is totally inelastic.

Explanation:

% change in price = (2.45 - 1.95) / 1.95 = 25.64%

Decline in demand = 8%

Elasticity of demand = % change in demand / % change in price

Elasticity of demand = 8% / 25.64% = 0.312

As the elasticity of demand is lower than 1, so it is totally inelastic. The consumption of cigarette is not reduced in the same proportion of increase in price. The cigarette is considered as habit or addiction which will have any significant effect in demand even if there is a substantial change in price.