Friday, August 2, 2013

Cross price elasticities on cigarettes and beer

I heard someone on the radio just mentioned that the tax increase on cigarettes also hits beer. Given that many people have at least a notional budget for discretionary items a ax that reduces forces people to spend more on the same amount of cigs would mean they have less to spend on beer. Makes sense.

I suppose because they are complementary products it would be a negative cross elasticity. Increase the price on one, decrease these and for the other. In the case of substitutes (ie nicorette gum) there would be - I suppose - a positive cross elasticity. Increase the price of cigarettes, increase the demand for Nicorette.

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