Economics Today 18th Edition by Roger LeRoy Miller

Exercise 2

Explaining a Higher Price Elasticity of Demand for "Smokes"
Vivien Azer, a tobacco industry analyst at Citibank, smoked traditional cigarettes for more than 20 years. Now, however, she has switched entirely to e-cigarette devices. Along with other Citibank analysts, Azer has completed a report that has provided a new estimate of the longrun price elasticity of demand for traditional cigarettes. A decade ago, the value of this elasticity ranged between 0.3 and 0.4. Azer and her report co-authors have found the current value has more than doubled, to 0.8.
Based on her own experience, Azer knows why the price elasticity of demand is greater. There are now dozens of producers of e-cigarette devices that transmit the nicotine and other typical components of traditional cigarettes via a vapor rather than via tar- and toxin-laden smoke. Because studies have shown that e-cigarettes are less harmful than traditional cigarettes, the demand for e-cigarettes is growing rapidly. Thus, e-cigarettes have emerged as a viable substitute for traditional cigarettes. People can also use flavor cartridges to alter the taste of e-cigarette-generated vapors, which further widens the range of substitution. Now that traditional cigarettes are confronted with these e-cigarette substitute products, the demand for traditional cigarettes has become less inelastic.
Do you suppose that the revenues of traditional cigarette firms rise as much as before following a given price increase? Explain.