Question

Consider public policy aimed at smoking. Studies indicate that the price elasticity of demand for cigarettes is about 0.2.

If a pack of cigarettes currently costs $5 and the government wants to reduce smoking by 10%, 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 3 months 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.

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

b,Adults are more likely to be addicted to cigarettes.

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

Answer 1

1. Price elasticity of demand = % change in Q / % change in P

0.2 = -10 / % change in P

% change in P = 50%

Thus, price must be increased by 50%

2. More than (because Demand is more elastic in the long run

3. Correct option: (a) and (b)

Reason: Teenagers are price sensitive (since they are not earning) and also adults are more addicted to smoking, making it harder to adults to quit smoking and thus gives them Inelastic demand