According to a study of US cigarette sales among 1955 and 1985, when the price of cigarettes was one percent higher, consumption would be 0.4 percent lower in the short run and 0.75 percent lowers in the long run (Becker et al., 1994).

1. Compute the short and long run price elasticity’s of the demand for cigarettes.

2. Is demand more or less elastic in the long run than in the short run? Describe your answer.

3. If the government were to impose a tax that raised the price of cigarettes by five percent, would total consumer expenditure on cigarettes (hint: which is total revenue for the firms) rise or fall in the short run? What about in the long run?