Question

Suppose income is $40,000, the excise tax on cigarettes is $1.20, and the person is a 35-year-old white, non-Hispanic male who completed high school (education level = 9).

Use the table below to calculate the elasticities of demand for cigarettes for this person with respect to excise tax and income.

Variable	Coefficient	Std. Error	t-stat
Intercept	17.22	0.63	27.34
Excise Tax	-2.28	0.33	-6.96
Income (thousands of $)	-0.002	0.0025	-0.8
Male	2.23	0.21	10.68
African-American	-5.05	0.34	-15.04
Educational level	-0.67	0.05	-12.42
Hispanic	-6.5	0.37	-17.55
R-squared	0.1132
Price elasticity	-0.0697
N	9,555

Answer 1

Estimated regression equation is:

Q( Quantity) = 17.22 - 2.28 x E - 0.002 x M + 2.23 x ML - 5.05 x AA - 0.67 x ED - 6.5 x H, where

E: Excise Tax,

M: Income,

ML: Dummy variable (1 if Male, 0 if Female)

AA: Dummy variable (1 if African-American, 0 otherwise)

ED: Education level

H: Dummy variable (1 if Hispanic, 0 otherwise)

Given:

E = 1.2

M = 40

ML = 1

AA = 0

ED = 9

H = 0

Therefore,

Q = 17.22 - 2.28 x 1.2 - 0.002 x 40 + 2.23 x 1 - 5.05 x 0 - 0.67 x 9 - 6.5 x 0

Q = 17.22 - 2.736 - 0.08 + 2.23 - 6.03

Q = 10.604

So:

(a) Elasticity with respect to excise tax = (Q/E) x (E/Q) = - 2.28 x (1.2 / 10.604) = - 0.258

(a) Elasticity with respect to income = (Q/M) x (M/Q) = - 0.002 x (40 / 10.604) = - 0.0075