Suppose the linear demand function for cigarette is Q = 600 4P + 2PM - 0.2I.

where Q = units of cigarettes

P = Price of cigarette

PM = Price of marijuana

I = Income level

Cigarette is selling at a price of $25. The price of marijuana is $100. 500 units of cigarette are sold in the market. Assume all goods are freely sold in the market.

a. Using the given figures, find the price elasticity of demand for cigarette. (2 marks)

b. Find the cross elasticity between cigarette and marijuana. Interpret the result. (3 marks)

c. Suppose the police cracks down a major marijuana supplier such that its price soars by 20%. Using the result in (b), calculate the impact on the sales of cigarettes. (3 marks)

d. Using the result in (b), suggest ONE policy change on marijuana so to discourage cigarette consumption. (3 marks)

e. How will the sales of cigarette change during economic recession? Explain. (3 marks)