Eco_1_problem_set_4

Eco_1_problem_set_4 - Eco 1 Spring 2008 Problem Set 4 1)...

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Eco 1 Spring 2008 Problem Set 4 1) According to a study by the federal Centers for Disease Control and Prevention, the price elasticity of demand for cigarettes is -0.25. Americans purchase about 480 billion cigarettes each year. a. If the federal tax on cigarettes were increased enough to raise the price of cigarettes by 50%, what would be the effect on the quantity of cigarettes demanded? b. Is raising the tax on cigarettes a more effective way to reduce smoking if the demand for cigarettes is elastic or if it is inelastic? Explain. 2) Use the following table (price changes for the first good and quantity-demanded changes for the second good). Good Cross-price elasticity of demand Air-conditioning units and Kilowatts of electricity -0.34 Coke and Pepsi +0.63 SUVs and petrol -0.28 McDonalds’ ‘food’ and Burger King’s ‘food’ +0.82 Butter and margarine +1.54 a) Explain the sign of each cross-price elasticity in the table above. What do they suggest about the relationship between the two goods? b) Why is the cross-price elasticity of demand greater for butter and margarine than
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This note was uploaded on 03/20/2008 for the course ECO 1 taught by Professor Gunter during the Spring '04 term at Lehigh University .

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Eco_1_problem_set_4 - Eco 1 Spring 2008 Problem Set 4 1)...

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