Question

1. When the price of cigarettes was $3.00 per pack, and 40 billion packs were sold. When the price dropped to $2.85 a pack because of a supply shift, 42 billion packs were sold. The demand for cigarettes was

1. perfectly elastic
2. perfectly inelastic
3. inelastic
4. unit-elastic

Answer 1

As per the information given

Price ($)	Quantity demanded (billion packs)	Total Revenue ($)
3	40	120
2.85	42	119.7

The demand must be price inelastic. As a decrease in the price the total revenues is also decreasing. Hence, the demand should be inelastic (Ed˂1)

Answer – Inelastic

Calculating the Price elasticity using the Mid-Point method

PED = (ΔQ ÷ ΔP) (P1+P2 ÷Q1+Q2)

PED = (-2 ÷ 0.15) (5.85 ÷82)

PED = 0.95

Demand is inelastic as PED ˂ 1.

Answer – (c) Inelastic