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In: Economics

Consider the public policy aimed at smoking. a.      Suppose studies indicate that the price of the elasticity...

Consider the public policy aimed at smoking.

a.      Suppose studies indicate that the price of the elasticity of demand for cigarettes is about 3. If the government is able to increase the price of a pack of cigarettes from $2 to $4 (through maybe, higher taxes), by what percentage will the consumption (demand) of cigarettes decrease? Please show all calculations.

Studies also find that the price elasticity of demand for cigarettes for higher-income earners is more inelastic compared to that of those earning less income. Why might this be true? Please explain your answer

Solutions

Expert Solution

Elasticity = percentage change in demand/percentage change in price

E = 3

Percentage change in price = [P2-P1/(P2+P1/2)] = [4-2/(4+2/2)] = 66.67%

So, demand would decrease by 66.67*3 = 200%

As high-income earners earn more money compared to those who earn less money, the price elasticity of demand for cigarettes tends to be inelastic as a small increase in price will not change their consumption habits and so would not change their demand for a cigarette by much compared to the people who earn less income.

Rahul Sunny answered 2 years ago
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