Answer to Question #301774 in Economics of Enterprise for Leonidos

Question

12. Looking at the increasing trend of smoking habit of teenagers, Ministry of Health, research team undertake a study and found that the price elasticity of demand for cigarettes is about 0.75. If a pack of cigarettes currently costs Rs.75 and government wants to reduce smoking by 30 percent, by how much should it increase the price?

Answer 1

If price elasticity of ci garettes is at 0.75 and the government want to reduce consumption by:

$0.75\times increase = 30;$

$Increase=\frac{30}{0.75}=40$

Increasing price by 40% will reduce consumption by 30%.

$New price=1.4\times75=105$

Increase=105-75=Rs. 30

For consumption to be reduced to 30%, price should be increased by Rs. 30 which is 40% increase.