Assignment 1

Topics: Supply and demand, Price elasticity of demand, Elasticity Pages: 2 (689 words) Published: June 16, 2013
Team assignment #1

Go to the National Bureau of Economic Research (NBER) Web site, http://www.nber.org, and select New Working Papers. In the Google search space, type "alcohol." Use the titles and summaries of the papers to answer the following questions relating to elasticity: (a) Do the mentally ill have perfectly inelastic demands for cigarettes and alcohol? Elasticity helps us define the relationship of changes in price and incomes to the effect of supply and demand. The question posed is: do the mentally ill have perfectly inelastic demands for cigarettes and alcohol? First, we must define what perfectly inelastic demand is. As defined by our textbook, a perfectly inelastic demand is one in which price change results in no change whatsoever in the quantity demanded. This is further defined as an extreme case. After reading a paper written by Henry Saffer and Dhaval Dave in 2002, the conclusions were rather convincing. When mental illness is not factored into price elasticity for cigarettes and alcohol, it is determined that raising the price of these addictive goods will lower the demand for them. The paper shows that mental illness raises the consumption of these addictive goods by 94% and 25% respectfully. Further, the test for elasticity was performed with this specific group in mind. It was determined that mental illness had no substantive effect on the price elasticity of cigarettes and alcohol. With this in mind it is easy to draw the conclusion that the mentally ill do not have perfectly inelastic demands for cigarettes and alcohol. Reference

Working paper 8699 Mental Illness and the demand for alcohol, cocaine and cigarettes by Henry Saffer and Dhaval Dave.

(b) Does alcohol consumption increase in bad times?
Before reading this article and looking at the question presented in front “ does alcohol use increase in bad times?’’ you would quickly determine that logically the answer is yes. With simple knowledge of alcohol intake...
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