According to studies undertaken by the U.S.

Department of Agriculture, the price elasticity of demand for cigarettes is between − 0.3 and − 0.4 and the income elasticity is about + 0.5.

a. Suppose Congress, influenced by studies linking cigarette smoking to cancer, plans to raise the excise tax on cigarettes so the price rises by 10 percent. Estimate the effect the price increase will have on cigarette consumption and consumer spending on cigarettes (in percentage terms).

b. Suppose a major brokerage firm advised its clients to buy cigarette stocks under the assumption that, if consumer incomes rise by 50 percent as expected over the next decade, cigarette sales will double. What is your reaction to this investment advice?