South-Western College Publishing - Economics  

Government and Cigarette Manufacturers Butt Heads
Subject Price Elasticity of Demand
Topic Elasticity
Key Words Tax, Price Increase, Quantity Demanded
News Story

An attempt in Congress to raise cigarette prices, now at $1.95 a pack, by $1.10, failed in June. The tobacco industry engaged in an ad campaign and lobbied Congress, alleging that taxes were harmful in general, but to the poor and minorities in particular.

A government study shows that a tax increase would reduce the quantity of cigarettes demanded. If the price of cigarettes were to rise 50 percent, one in eight smokers would quit or cut back?about 7 percent would quit and approximately 5 percent would cut back. A price increase of 25 percent would lead to one in sixteen quitting or cutting back.

As the tobacco industry realized, the effects would be more pronounced for certain groups. A 50 percent increase in price would cause 95 percent of Hispanics--29 percent of those aged 18 to 24, and 15 percent of those earning median or lower incomes--to quit or cut back. However, the Centers for Disease Control and Prevention see this as advantageous since tobacco-related diseases are found more among low-income and minority groups.
(Updated August 18, 1998)

Questions
  1. Suppose that cigarette prices were to increase by 50 percent. For the ease of calculation, also assume that the percentage of people who would quit or reduce their consumption of cigarettes according to the study is the same as the percentage change in quantity demanded. Calculate the price elasticity of demand for the following groups of consumers:

    a. All smokers
    b. Hispanic smokers
    c. Smokers aged 18 to 24
    d. Smokers earning median or lower incomes

  2. a. Compared to all smokers, do the Hispanic, younger, and low-income smokers have a more or less inelastic demand for cigarettes?
    b. How would you account for this? Refer to the determinants of the price elasticity of demand.

  3. Why, in spite of price increases, are most smokers unlikely to change their smoking habits? Again, consider the determinants of the price elasticity of demand.
Source Associated Press, “Price tied to quitting smoking,” Cincinnati Post, July 31, 1998.

Return to the Elasticity Index




©1998  South-Western College Publishing.  All Rights Reserved   webmaster  |   DISCLAIMER