Suppose that the federal government is considering a new tax on cigarettes that is estimated to increase the retail price by $0.30 per pack. If the current price per pack is $8.60, use the regression in column (1) to predict the change in demand. What is the expected percentage change in cigarette demand?

0.32 %

Explanation:

Demand is the quantity that buyers are able & willing to buy, at a particular price & period of time. It is inversely related to price, as per law of demand.

Demand function is a regression equation that shows the relationship between dependent variable (demand) & independent variable (price)

Q = A - BP

where Q = Demand, A = Autonomous Demand, P = Price, B = Change in demand per unit change in price

Change in Quantity = B x Change in Price

Example : Considering Q = 50 - 0.5 P

Q {At previous P} = 50 - 0.5 (8.6) → = 50 - 4.3

= 45.7

Q {At new P} = 50 - 0.5 (8.3) → = 50 - 4.15

= 45.85

Change in Quantity = 45.85 - 45.7 → = 0.15

Alternative Method : ΔQ = B x ΔP → = (0.30) x (0.5) → = 0.15

Percentage Change in Quantity = [Change IN Quantity / Old Quantity] x 100

[ΔQ/Q] x 100 → = [0.15 / 45.7] x 100 → = 0.32 %