Answer to Question #299947 in Economics of Enterprise for fareeha

Question

Q.3

Consider 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 costs $2 and the government wants to reduce smoking by 20 percent, by how much should it increase the price? 

b. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or five years from now? 

c. Studies also find that teenagers have a higher price elasticity of demand than do adults. Why might this be true?

Answer 1

a. If a pack of cigarettes currently costs $2 and the government wants to reduce smoking by 20 percent, then it should increase the price by 20/0.4 = 50 percent to $3.

b. If the government permanently increases the price of cigarettes, then the policy will have a larger effect on smoking five years from now, because the demand is more elastic in the long run.

c. Teenagers may have a higher price elasticity of demand than do adults, because they may be less addicted.