Question

Consider public policy aimed at smoking. Studies indicate that the price elasticity of demand for cigarettes is about 0.5.

If a pack of cigarettes currently costs $5 and the government wants to reduce smoking by 30%, it should increase the price by

.

If the government permanently increases the price of cigarettes, the effect on smoking 1 year from now will be   than the effect 5 years from now.

Studies also find that teenagers have a higher price elasticity of demand than do adults.

Which of the following statements are consistent with this result? Check all that apply.

It is legal for adults to consume alcohol, so many choose to spend their money on that good rather than cigarettes.

Adults are more likely to be addicted to cigarettes.

Teenagers do not have as much income as adults, so they are more price sensitive.

Answer 1

Price elasticity = % decrease in demand of cigarette / % increase in price of cigarette

% increase in price of cigarette = % decrease in demand of cigarette/ Price elasticity

% increase in price of cigarette = 30% / 0.5 = 60%

So, price should be increased by 60%.

In case of inelastic demand, larger is the time period, greater will be the impact on quantity demanded and vice-versa.

If the government permanently increases the price of cigarettes, the effect on smoking 1 year from now will be SMALLER than the effect 5 years from now.

Correct option:

Adults are more likely to be addicted to cigarettes.

Teenagers do not have as much income as adults, so they are more price sensitive.

Teenagers may not have their own source of income, it makes them more price elastic in comparison to the adults. Besides, adults are more prone to the addiction towards cigarette that makes them less price elastic to the cigarette and it becomes very difficult for them to move on to other substitutes.

Hence, the correct answer is the option (2) and (3).