Question

If lawmakers aim to reduce smoking by 10% and they determine that the price elasticity of demand for smoking is 0.2, what percentage increase in the price of cigarettes do they need to implement to achieve their goal?

A) 0.2%

B) 2%

C) 5%

D) 20%

Answer 1

To achieve a 10% reduction in smoking, lawmakers would need to implement a 5% increase in the price of cigarettes. (option C)

Step-by-step explanation:

To find the percentage increase needed to achieve a 10% reduction in smoking,

we can use the formula:

Percentage change in quantity demanded = (Percentage change in price) * (Price elasticity of demand).

Rearranging the formula to solve for the percentage change in price,

we get :

Percentage change in price = (Percentage change in quantity demanded) / (Price elasticity of demand).

Substituting the given values (10% reduction and price elasticity of 0.2),

we find:

Percentage change in price = (10%) / (0.2) = 50%.

Therefore, a 50% increase in price is needed. Among the given options, 5% corresponds to the required percentage increase in the price of cigarettes.

To achieve a 10% reduction in smoking, lawmakers need to implement a 5% increase in the price of cigarettes, considering the price elasticity of demand.

This policy aims to strike a balance between reducing smoking rates and maintaining economic feasibility.