Question

Consider public policy during COVID-19:

a. Recent data shows that the elasticity of hand sanitizer is about 0.4 percent. The
current price of sanitizers is $5. Let suppose that government want to increase the
usage of sanitizers by 20 percent. Please identify by how much should the price of
hand sanitizers should change?
b. To promote the culture of health and safety. The government wants to curb the
usage of products affecting the immune system of its’ people. Government decide to increase the prices of cigarettes in this regard. Let suppose government decide to
increase the prices permanently, explain if the policy has a larger effect on smoking
1 year or 5 years from now.
c. Data on cigarettes shows that price elasticity of demand for teenagers is more than
the adults, please justify your answer with reference to elasticity theory.

Answer 1

A) Price elasticity of demand = % change in Q/% change in P

0.4 = 20 / % change in P

% change in P = 50

Thus, price must fall by 50% in order to increase sales by 20%

New price must be 5(1-0.5) = $2.50

B) The policy will have larger effect on smoking 5 years from now. This is because demand for smoking is relatively inelastic in the short run but elastic in the long run due to introduction of substitutes in the long run.

Thus, larger effect on smoking can only be seen in 5 years from now.

C) This is because smoking is found to be more addictive in case adults who have been smoking for years, instead of teenagers who have started smoking recently and can still quit.

This makes demand for smoking quite inelastic for adults but elastic for teenagers.

Adults would not reduce their demand for smoking if prices of cigarettes increase, but teenagers would still reduce their demand if price of cigarettes increases.