7. In 2010, Americans smoked 315 billion cigarettes, or 15.75 billion packs of cigarettes.
The average retail price (including taxes) was about $5.00 per pack. Statistical
studies have shown that the price elasticity of demand is -0.4, and the price
elasticity of supply is 0.5.
a. Using this information, derive linear demand and supply curves for the
cigarette market.
b. In 1998, Americans smoked 23.5 billion packs cigarettes, and the retail price
was about $2.00 per pack. The decline in cigarette consumption from 1998
to 2010 was due in part to greater public awareness of the health hazards
from smoking, but was also due in part to the increase in price. Suppose
that the entire decline was due to the increase in price. What could you
deduce from that about the price elasticity of demand?