According to S. Sackrin of the U.S. Department of Agriculture, the price elasticity of demand for cigarettes is between -0.3 and -0.4, and the income elasticity of demand is about 0.5.
(a) Suppose the federal government, influenced by findings that link cigarettes and cancer, were to impose a tax on cigarettes that increased their price by 15 percent. What effect would this have on cigarette con¬sumption? Please calculate the percent change in cigarette consumption and show your calculations.
(b) Suppose a brokerage house advised you to buy cigarette stocks because, if incomes rise by 50 percent in the next decade, cigarette sales would be bound to spurt enormously. What would be your reaction to this? Please explain.