Question

Consider a public policy aimed at smoking. a) Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently cost $2 and the government wants to reduce smoking by 20%, then by how much should it increase the price

Answer 1

The price should be increased by 50%.

Step-by-step explanation:

The can be determined using the formula for calculating the price elasticity of demand as follows:

Ep = Percentage change in quantity demanded / Percentage change in price .......... (1)

Where,

Ep = price elasticity of demand for cigarette = 0.4

Percentage change in quantity demanded = 20%

Percentage change in price = ?

Substituting the values into equation (1) and solve for Percentage change in price, we have:

0.4 = 20% / Percentage change in price

Percentage change in price * 0.4 = 20%

Percentage change in price = 20% / 0.4

Percentage change in price = 0.50, or 50%

Since the percentage change in price is 50%, it therefore implies that the price should be increased by 50% to reduce smoking by 20%.