1-In order to reduce smoking, the government places an additional tax of $2 on a pack of twenty cigarettes. After one month, while the price to the consumer has increased a great deal, the quantity demanded of cigarettes has been reduced only slightly.

a.Is the demand for cigarettes over the period of one month price elastic or price inelastic? Explain your answer.

b.Suppose you are in charge of pricing for a tobacco firm. The chief executive of your firm suggests that the evidence received over the last month demonstrates that the cigarette industry should get together and raise the price of cigarettes further because total revenue to the tobacco industry will certainly rise. Is the chief executive of your firm correct? Why?

c.As an alternative, suppose the chief executive of your tobacco firm suggests that your firm should raise the price of your cigarettes independent of the other tobacco firms because the evidence clearly shows that smokers are insensitive to changes in the price of cigarettes. Is the chief executive of your firm correct if it is his desire to maximize total revenue? Why?

Price

(dollars per ticket)

Quantity demanded business travelers

(tickets per week)

Quantity demanded leisure travelers

(tickets per week)

0

1,800

1,600

100

1,600

1,200

200

1,400

800

300

1,200

400

400

1,000

0

500

800

0