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HW 2
Abigail Palmer
902048862
1. In 1998, Americans smoked 470 billion cigarettes, or 23.5 billion packs of
cigarettes. The average retail price was $2 per pack. Statistical studies have shown
that the price elasticity of demand is 0.4, and the price elasticity of supply is 0.5.
Using this information, derive linear demand and supply curves for the cigarette
market.
%ΔQ/%ΔP= ε = 0.4 = %ΔQ/1
So, the percent change in quantity
demanded for every dollar increase in the
price of a pack of cigarettes is 40%.
The linear demand curve is therefore:
Qd = 9.4p + 42.3
%ΔQ/%ΔP= ε = .5 = %ΔQ/1
So, the percent change in quantity supplied
for every dollar increase in the price of a
pack of cigarettes is 50%.
The linear supply curve is therefore:
Qs =
11.75p
2. The table below shows the retail price and sales for instant coffee and roasted
coffee for 1997 and 1998.
a. Using this data alone, estimate the shortrun price elasticity of demand for
roasted coffee. Derive a linear demand curve for roasted coffee.
ε = %ΔQ/%ΔP = [(850820)/820]
/
[(3.764.11)/4.11]
= 0.0366/0.08516 = .43
Therefore, the price elasticity of demand for roasted coffee is
.43.
The linear demand curve is:
Qd = 85.72p +1172.35
b. Now estimate the shortrun price elasticity of demand for instant coffee. Derive a
linear demand curve for instant coffee.
ε = %ΔQ/%ΔP = [(7075)/75]
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 Fall '07
 Besedes
 Microeconomics, Price Elasticity

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