Explain how price elasticity of demand affects a product

Directions

Folk wisdom has it that when people lose their jobs, they drown their sorrows in drink. Economists have long challenged this assumption citing two reasons:

· Overall consumption of alcohol does not increase during recessions.

· Falling incomes during a recession make it harder to people to increase their purchases of booze.

Two economists took a close look at a broad survey of more than 50,000 persons each year from 1987 to 1999. They found that drinkers do reduce their consumption substantially in economic downturns.

· A one-percentage-point increase in unemployment in a state decreased alcohol consumption by drinkers by more than 3 percent.

· A one-percentage-point rise in the national unemployment rate decreased alcohol consumption by 4 percent.

Questions:

1. Explain why it i s or is not possible to calculate the elasticity of demand for alcohol consumption for the state situation?

2. Explain why it is or is not possible to calculate the elasticity of demand for alcohol consumption for the federal situation.

3. Were the demands calculated above elastic or inelastic?

4. Do you think that alcohol abuse will become such an increasing problem during recessions that would cause some government action to take place?

Write your answers in a paper of no fewer than 500 words.