In: Economics
2. In 2017, Americans spend about 1.3 billion dollars on e-cigarettes, equivalent to about 90 million units of pre-filled e-cigarettes (Q*=90). The average retail price (including taxes) was about $14.00 per unit. Statistical studies have shown that the price elasticity of demand is −0.4, and the price elasticity of supply is 0.6.
a. Using this information, derive linear demand and supply curves for the cigarette market.
b. Recent research findings about the negative impact of e-cigarette consumption has drawn some public concern. Suppose that e-cigarette firms decided to lower the price to 12 dollars in 2019, and its consumption volume in that year was 94 million units. What could you deduce from that about the price elasticity of demand?