Discussion:
According to a study of US cigarette sales between 1955 and 1985, when the price of cigarettes was 1% higher, consumption would be 0.4% lower in the short run and 0.75% lower in the long run (Becker et al., 1994).
a. Calculate the short and long run price elasticities of the demand for cigarettes.
b. Is demand more or less elastic in the long run than in the short run? Explain your answer.
c. If the government were to impose a tax that raised the price of cigarettes by 5 percent, would total consumer expenditure on cigarettes (hint: which is total revenue for the firms) rise or fall in the short run? What about in the long run?