Assume that the elasticity of demand for chewing tobacco is

Assume that the elasticity of demand for chewing tobacco is 0.70 and the elasticity of supply is 2.30. Suppose an anti-chewing campaign decreases the demand for chewing tobacco by 18 percent. The equilibrium price of chewing tobacco will _______ (decrease/increase) by _______ percent.

Solution

Using the price change formula, equilibrium price (%) = Percentage change in demand / (Elasticity of demand + Elasticity of supply)

                                                                                          = -18 / (0.70 + 2.30)

                                                                                          = -18 / 3

                                                                                          = -6

Answer: The equilibrium price will decrease by 6 percent.