MAE201 ASSIGNMENT
Q1 Which measure is particularly relevant in assessing the impact of raising cigarette taxes on the consumption of cigarettes? (1 point) Provide some estimates of this measure while clearly citing the source. (1 point) Briefly mention two factors that can affect its size. (2 points)
Assuming an adult smoker allocates income between smoking cigarettes and other goods, what would be your guess about the slope of the price-consumption curve for cigarettes? (2 points)
Price elasticity of cigarette demand is the most relevant measure used in this assessing the impact of raising cigarette taxes on the consumption of cigarettes. Since economists use the estimates of the price elasticity of demand to quantify the impact of a change in price on consumption. Since the tax can change the price and thus change demand, therefore, it can be assessed with price elasticity. The estimate of price elasticity of demand of cigarette from the USA and other high income countries falls in the range of -0.25 to -0.50 (Chaloupka and Warner, 2000a, 2000b). The addictiveness of smoking and whether the smoker is young or adult are the two factors can influence price elasticity. The slope of price-consumption curve for cigarettes is upward.
2. Assume that all smokers allocate income between smoking cigarettes and “other” goods and consider both of them as normal goods. Using a diagrammatical analysis, explain why a young smoker’s adjustment to a price increase in cigarettes differs from that of an adult smoker.
This part will use the income effect and substitution effect of normal goods when the price increases to analyze the difference of the adjustment of young smoker and adult smokers to price changes. The following figure shows the case of young smoker. OX1 and OX2 represent the quantity of cigarette consumption and other goods respectively. Both of them are normal goods.
As shown in the above figure, before the price change, the consumer
Assuming an adult smoker allocates income between smoking cigarettes and other goods, what would be your guess about the slope of the price-consumption curve for cigarettes? (2 points)
Price elasticity of cigarette demand is the most relevant measure used in this assessing the impact of raising cigarette taxes on the consumption of cigarettes. Since economists use the estimates of the price elasticity of demand to quantify the impact of a change in price on consumption. Since the tax can change the price and thus change demand, therefore, it can be assessed with price elasticity. The estimate of price elasticity of demand of cigarette from the USA and other high income countries falls in the range of -0.25 to -0.50 (Chaloupka and Warner, 2000a, 2000b). The addictiveness of smoking and whether the smoker is young or adult are the two factors can influence price elasticity. The slope of price-consumption curve for cigarettes is upward.
2. Assume that all smokers allocate income between smoking cigarettes and “other” goods and consider both of them as normal goods. Using a diagrammatical analysis, explain why a young smoker’s adjustment to a price increase in cigarettes differs from that of an adult smoker.
This part will use the income effect and substitution effect of normal goods when the price increases to analyze the difference of the adjustment of young smoker and adult smokers to price changes. The following figure shows the case of young smoker. OX1 and OX2 represent the quantity of cigarette consumption and other goods respectively. Both of them are normal goods.
As shown in the above figure, before the price change, the consumer