Question

"the long-term price elasticity of the cigarette industry has ranged from -0.3 to -0.4 in 10-year averages, however, Citigroup found that price elasticity in the U.S. was -0.8 in 2012, a dramatic change"

As a result, cigarettes have

Hint: Classification of elasticity is in absolute value

A. becomes more inelastic

B. becomes less inelastic

C. not changed in elasticity

D. cannot be determined

Answer 1

Answer. (b) becomes less inelastic

Explanation: Both the 10-year average elasticity and 2012's elasticity shows that the absolute value of elasticity is moving towards 1. This shows that the cigarette demand is becoming elastic over time, which means that price changes are bringing about larger changes in quantity. This might be due to the reason that now more awareness is there about the ill-health effects of smoking, and thus even a small price change encourages them to stop or reduce smoking by a larger amount.