Question

 

10. Problems and Applications Q10

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 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.

Adults are more likely to be addicted to cigarettes.

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

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

Answer 1

The formula for price elasticity of demand is

E = (% change in quantity demanded / % change in price)

Here, E = 0.5 and % change in quantity demanded = 30%.

So, % change in price = (30% / 0.5) = 60%.

So, the government should increase the price by 60% .

From theory we knew that, in the long run there will be larger impact on quantity demanded due to larger elasticity. Now, as one year is larger than 3 months, so the effect on smoking 1 year from now will be larger than the effect 3 months from now.

The following statements are consistent with this result:

Adults are more likely to be addicted to cigarettes.

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

This is because, adults have more addiction for cigarettes than students. And, as student does not not as much as adults, so they have higher price sensitivity than adults.