Question

Suppose the demand for cigarettes is perfectly inelastic, while the supply of cigarettes slopes upward from left to right. The equilibrium price of cigarettes is $5 and the equilibrium quantity is 100 packs
a) Draw the market for cigarettes given the information above. Label the equilibrium point, axes, and any ntercepts
b) What would happen if the price of cigarettes were $6 per pack and not at the equilibrium of $5 per pack? Would it stay at $6 per pack? Briefly explain.
c) Suppose that as a result of government anti-smoking campaigns, the demand for cigarettes decreases to 80 packs (but is still perfectly inelastic). What would happen to the equilibrium price (increase, decrease, not change)? What is the new quantity?

Answer 1

Answer:

See below and the picture attached.

Explanation:

For a)

Find the attached image. The initial equilibrium is at EQD1 and Price = 5, the quantity demanded at this level is 100 cigarettes.

For b)

When the price rises to $6, the supply curve for cigarettes shift outwards to supply 2 while the inelastic demand stays the same. This forms and equilibrium of Price 2 and EQD1, qty demanded is still at 100 packs. It would stay the same as there is no demand loss pressure from inelastic demand.

For c)

When the demand falls to 80 packs but remains inelastic, there is a horizontal demand curve shift to the left, from D1 to D2. This forms a new equilibrium with Price = p3 that is less than the equilibrium price of $5. The new quantity demanded and supplied will form a new equilibrium for D2 = 80 packs but price less than the initial P1.

Hope that helps.