The WSJ (March 2022) reports that "Rigorous studies have proved that tobacco has a negative price elasticity: For every 10% increase in price, consumption declines by about 4% and by about 8% for children and lower-income groups. About half of that decrease is from people quitting and the other half from people cutting down on the number of cigarettes they smoke."
The report implies that the price elasticity of demand, e, is -4/10 = -0.4 and for children e = -8/10 = -0.8. In both cases, demand is inelastic but not perfectly elastic: e > -1 (and |e| < 1).
Here are some questions.
- What would happen to the profits earned by cigarette companies if they all raised their prices by 10%?
- Why doesn't an individual firm raise its price by 10%?
No comments:
Post a Comment