solution

According to S. Sackrin of the U.S. Department of Agriculture, the price elasticity

of demand for cigarettes is between -0.3 and -0.4, and the income

elasticity of demand is about 0.5. a. Suppose the federal government, influenced by findings that link cigarettes and cancer, were to impose a tax on cigarettes that increased their

price by 15%. What effect would this have on cigarette consumption?

b. Suppose a brokerage house advised you to buy cigarette stocks because

if incomes were to rise by 50% in the next decade, cigarette sales would

be likely to spurt enormously. What would be your reaction to this

advice?