Q-2 Based on the price elasticity estimates, explain own and cross price elasticities for the tobacco

products (bidi, cigarette and leaf tobacco). Assume a hike of 5% on bidis and 15% on cigarettes,
how would the young consumer react?

Ans- There are different own and cross price elasticities that tobacco products have based on Price
elasticity estimates as they respond differently with change in own prices and cross prices. Own-price
elasticities of demand for leaf tobacco and bidi are negative except for the cigarettes in urban areas.

From Table 5. We can infer that own price elasticity in both urban and rural area is same. However,
cigarettes do not have much elasticity of demand in urban areas when compared to rural areas.

With an increase in price of bidis by 5% and cigarettes by 15%, a young consumer living in urban area
who used to consume cigarettes will continue consuming the cigarettes as there is inelastic demand.

Effect of 5% increase in Bidi prices on young consumers-

 Consumption of bidis will reduce by 4.25% in urban areas and by 4.6% in rural areas.
 Consumption of cigarettes will reduce by 0.45% in urban areas and by 2.25% in rural areas.
 Consumption of leaf tobacco will reduce by 0.35% in urban areas and by 0.18% in rural areas.

Effect of 15% increase in Cigarettes prices on young consumers-

 The consumption of bidis will reduce by 0.94% in urban areas and by 1.26% in rural areas.
 Consumption of Cigarettes will reduce by 2.9% in urban areas and by 5.1% in rural areas.
 Consumption of leaf tobacco will reduce by almost 0% in urban areas and by 0.33% in rural
areas.

Own Price Elasticity

Bidis:

When there is an increase in price of bidi by 5%, there is almost similar effect on
consumption in both rural and urban areas.

Cigarettes:

Owing to the income levels, rural households are more affected by the increase in prices
of cigarettes compared to urban households who are relatively inelastic.

Cross-Price Elasticity:

While examining the elasticity co-efficient in rural areas, we can infer that the effect of
increase in price of cigarettes on bidis and effect of increase in price of bidis on
cigarettes is different.

With increase in price of bidis by 5% and cigarettes by 15%, there are following effects:

 There is very less impact of increase in cigarettes price on bidis consumption.

 With relatively low (5%) increase in bidis price, there is almost no effect on the
consumption of both.