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Introduction :
Elasticity
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Managerial Economics
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Managerial Economics
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Price of
Cigarettes
Due to
a decrease
in adrevertising
D1
D2
Quantity of
cigarettes (X)
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Managerial Economics
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2.What you conclude about the price elasticity of demand and income
elasticity?
Explain the effect of price and income
changes as demand determinants on
cigarette consumption
demand shifters, and e is the dandom error term that has a zero
mean.
Initial line
M1/Py M/Py
New budget
line
X M/P1x
M/pox X
Table
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All countries
Developing countries
Di and Dt represent country and time effects included in the model . Dependent variable is ln C ***
Significant at 1% **Significant at 5% and * Significant at 10% .
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The author concludes that the impacts of advertising bans are more
effective for controlling cigarette consumption in developed than
.developing countries depends on literature view and data analysis
Economists have added much value to this debate with many studies
showing that advertising has had a positive impact on aggregate
consumption.
Nelson (2003) uses the fitted values for the advertising restriction
score as an instrumental variable in estimating tobacco demand.7
Nelson (2003) finds that income and prices are statistically significant
in predicting demand, while warnings are only statistically significant
in the first sample period while the advertising restriction score is not
statistically significant in any of the samples. Although not
statistically significant the coefficients are negative in all samples,
which are inconsistent with the results Nelson (2003) found in the
single equation models. The t-statistic also falls over the three
samples indicating that advertising restrictions have become less
important in determining consumption. In order to test the
endogenously of the advertising bans, a Hausman test was performed
which failed to reject the null hypothesis that advertising bans were
exogenous, indicating that the two stage model is important in
explaining the relationship between the political economy and
advertising bans and their relationship with consumption. Nelson
(2003) concludes that advertising bans and restrictions have had no
effect on consumption although the final model he presents does
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Managerial Economics
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suggest that this is not the case and that in fact, advertising bans and
restrictions have had a very small, albeit insignificant, effect on
consumption.
Moreover for one the literature indicates that the impact of price
change has a large impact on consumption in developing countries
via-a-vis developed countries. VanWalbeek(2005,p.80)indicates that
“the consensus view is that the price elasticity of demand is a round
-0.4developed countries and between -0.4and -0.8 for developing
countries” farther more, changes in income also have a great impact
on consumption in the developing world than the developed world
.Thus it can be said that tobacco demand is more sensitive to its
determinants in the developing world relative to the developed world.
Consumers are more sensitive to demand sided intervention. Whether
it be price increases as result of tax increases or non-price measure
including advertising bans, public smoking bans and social factor.
There are a number of reasons for this greater sensitivity, firstly the
price of cigarette takes up a greater portion of a consumer’s income
in the developing world than in rich country (Blecher and Van
Walbeek, 2004).Thus as a result an increase in price has a relatively
greater impact on a person’s relative budget. Farther more, consumer
in poorer countries are likely to have lower education levels and thus
have a poorer understanding of the health consequences of smoking.
Thus the impact of advertising may be weaker in high income
countries since a fewer number of smoker are enticed by advertising
due to the better understanding of the health consequence.
By Haitham A.Karim
Sp21035
Sb21088
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