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The table shows market data for e-cigarette kits - Edexcel - A-Level Economics A - Question 1 - 2017 - Paper 1
Question 1
The table shows market data for e-cigarette kits. The original equilibrium price is £23. | Price £ | Quantity demanded per month (000) | Quantity supplied per month... show full transcript
Worked Solution & Example Answer:The table shows market data for e-cigarette kits - Edexcel - A-Level Economics A - Question 1 - 2017 - Paper 1
Step 1
Calculate the new equilibrium price and quantity following the successful advertising campaign and the fall in production costs.
Answer
To find the new equilibrium price and quantity, we need to look at the last two columns in the table. After the advertising campaign, the new quantity demanded increases by 3,000 units at each price level, and the supply increases by 1,000 units.
From the table:
- At a price of £24, the new quantity demanded is 9,000 (6,000 + 3,000) and the new quantity supplied is 8,000 (7,000 + 1,000).
- At £23, the new quantity demanded is 10,000 (7,000 + 3,000) and the new quantity supplied is 10,000 (8,000 + 1,000).
The new equilibrium price is £24 and the new quantity at this price is 9,000.
Step 2
Research conducted in New Zealand in 2014 estimated the cross elasticity of demand for e-cigarettes to be 0.16 in response to changes in the price of tobacco.
Answer
To find the percentage change in demand for e-cigarettes given a 5% increase in the price of tobacco, we use the formula:
[ \text{Percentage Change in Demand} = \text{Cross Elasticity} \times \text{Percentage Change in Price of Tobacco} ]
Substituting in the values: [ \text{Percentage Change in Demand} = 0.16 \times 5% = 0.008 = 0.8% ]
Thus, the answer to part (b) is C.