Question

Consider the following policies of the government related to smoking.

1. Suppose the price elasticity of demand for cigarettes is 0.5. If a pack of cigarettes costs $3 and the government wants to reduce smoking by 20 percent, by how much should it increase the price?

       Answer:

2. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or five years from now?

Answer:

3. The teenagers have a higher price elasticity than do adults. Why might this be true?

Answer:

Answer 1

Answer (a)

Price elasticity of demand = Percentage change in quantity demanded/ Percentage change in price

Percentage change in price = 20/0.5 = 40%

Therefore, price should be increase by 40%

Which means $3 +40% = $4.20

Answer (b)

Since cigarette is a habit so hard to kick off, it's demand is high inelastic which means any Percentage changd in price will have a little or no effect on quantity demanded . Therefore, if the government permanently Increases price of cigarettes policy will have larger effect from five year from now since people who smoke won't be able to quit smoking in short term.

Answer (c)

Teenager have higher price elasticity than do adults because smoking is a habit a person can't quit instantly. Which means teenager who have just started to use cigarette are less habituals than adults who are highly habitual and addictive to smoking. Therefore any change in price will have much impact on teenagers than adults.