If the elasticity of demand for cigarettes is 0.75 and the elasticity of supply for cigarettes is 1.25, then a 5% decrease in the demand for cigarettes would cause the price of cigarettes to:
decrease by 2.5%.
increase by 2.5%.
decrease by 5%.
increase by 5%.
To determine the effect of a 5% decrease in demand on the price of cigarettes, we can use the concept of elasticity. The price change can be calculated using the formula for the equilibrium price change in response to shifts in demand and supply:
[ \text{Percentage change in price} = \frac{\text{Percentage change in demand}}{E_d + E_s} ]
Where:
Substituting the values into the formula:
[ \text{Percentage change in price} = \frac{-5%}{0.75 + 1.25} = \frac{-5%}{2} = -2.5% ]
This means that a 5% decrease in the demand for cigarettes would cause the price of cigarettes to decrease by 2.5%.
Thus, the correct answer is:
decrease by 2.5%.