Question

In 1998, Americans smoked 23.5 billion packs of cigarettes at an average retail price of $2.00...

  1. In 1998, Americans smoked 23.5 billion packs of cigarettes at an average retail price of $2.00 per pack. Statistical studies have estimated the price elasticity of demand for cigarettes as -0.4 and the price elasticity of supply as 0.5. Using this information, find the equations for linear demand and supply curves for cigarettes.
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Answer #1

We have the following information

P = $2

Q = 23.5 billion

ed = -0.4

es = 0.5

Price elasticity of demand ed = price coefficient x P/Q

-0.4 = price coefficient x 2/23.5

price coefficient = 4.7

Demand equation is Q = A - 4.7P where P is 2. Hence we have intercept A given by

23.5 = A - 4.7*2

A = 32.9

Thus, the demand function is Qd = 32.9 - 4.7P

Price elasticity of supply es = price coefficient x P/Q

0.5 = price coefficient x 2/23.5

price coefficient = 5.875

Demand equation is Q = B + 5.875P where P is 2. Hence we have intercept B given by

23.5 = A + 5.875*2

A = 11.75

Thus, the supply function is Qs = 11.75 + 5.875P

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