Question

Given the following estimated demand equation Answer the following questions

“From the data for 50 States in the United States for 2015, the following Regression Equation was estimated:

Ln C =             5.75 – 1.29 LnP + 0.67 LnY - 0.022LnA - 0.03LnExcT

T- Stats:           (0.91) (1.45)       (2.45)           (1.02)          (2.04)                            

R² _{= 0.87;}

_{T- table value at 95%; and 46 degrees of freedom is 1.96.}

Where C = Cigarette consumption packs per year

            P = real price per pack

            Y = Real disposable income per capita

                        A= Per capita Advertising expenditure

                        Exc = Excise tax per packet

            T-values are all in the parentheses      

a). What is the elasticity of demand for cigarettes with respect to price? Is it statistically significant? Interpret this number in plain English

b) What is the Income Elasticity of Demand for Cigarettes? Is it statistically significant? Interpret this number

c) Some people claim that Advertising has No bearing on consumption of cigarettes. Do you agree/ Why or Why Not?

d) Using your calculator, or EXCEL can you predict the level of Consumption of Cigarettes when the Price per pack is $6.25, Income per capita is $69,600, and Advertising expenditure is 30 million dollars? What is that number?

e) Suppose the State of Wisconsin is proposing to increase 10% increase in its Excise tax on cigarette for collecting more “sin-tax” and to promote healthy life-style. Do you think that measure will change anything? Why? Or Why not?

Answer 1