Question

Part-1
Government insists the society to stop consuming the cigarettes and to protect their health.
Smoking is injurious to health is a slogan used by all the countries throughout the world in which
creating awareness among this cigarettes smokers. Cigarette causes cancer and other diseases to
the human body. Government wants to reduce the cigarette consumption, hence imposing higher
amount of tax by which increasing the price to cut the cigarette smoking. There are two methods:
attempted to achieve this objective.

First Method:
Creating awareness through advertisements in theaters, newspapers, television and other
channels, printing health warnings on cigarette pockets, and posters fixed in shops are the
various measures taken by the government to reduce the demand of the cigarettes. Based on the
government initiatives, personal healthcare issues and the taste and preferences of the smokers
are not favor for the product when the prices are constant and leads to shift the demand curve.

Government has been trying to increase the price of cigarettes by which imposing maximum tax
on the product. Higher price discourages smokers to reduce the numbers of cigarettes smoking in
a day. The demand of the product meets changes in terms of production and consumption, thus
the demand curve is to be changed.   

They have originated that a 10 percent rise in the price causes 4 percent decrease in the quantity
demanded. Youths are found to be particularly sensitive to the price of cigarettes: A 10 percent
rise in the price causes a 12 percent drop in teenage smoking. Because of increased awareness of
people towards effect of smoking there is a growth of alternative industry as a substitute to
cigarettes. i.e. Nicotine Gum, Herbal Cigarettes, Electronic Cigarettes and Acupuncture etc.

Questions:
8. There are two set of consumers on whom the effect of pricing is different. Illustrate
the difference in the two set of consumers response to price change in term of
elasticity of demand.

9-With the increase of alternatives in the market for the Cigarette will elasticity of the
product will be effected? Explain how the elasticity of the product has changed with
entry of new alternatives in the market. What was the elasticity in the past and how
it has changed in the present? (2.5 +2.5 = 5 Marks

10. Explain Cross elasticity of demand in relation to cigarettes and its substitutes in the
market. Explain the answer in relation to the case mentioned?

Answer 1

8. There are two set of consumer first is young group which elasticity of -4/10 while other group is 3 is group which has price elasticity of -12/10. Young group has lower price elasticity while teenage group higher price elasticity. Teenage group are more price sensitive and in the earlier stage they are less addicted.

9. Yes availability of alternative will change the elasticity as rise in price will provide incentive to purchase other alternative to cigarette. There is more variety of substitute which influence the consumer through substitution effect. Elasticity previously was -4/10 and -12/10and with the rising popularity of alternative elasticity will increase to say that 10/10 and 20/10.

10. Cross elasticity is the the percentage change in quantity of alternative goods due to price change in original gods. In this case the cross elasticity of cigarette and nicotine gum can be given by percentage change in price of cigarette divided by percentage change in quantity of nicotine gum. Hey government raise the tar on cigarette by 2 dollar then increase in price by $2 will make more demand of nicotine gum as it become relatively cheaper than cigarette.