Answer to Question #186270 in Microeconomics for fahmida

Question

When Samia’s monthly income increased from 13000 taka to 20000 taka, she decreased her demand for rice  by 10%. Calculate her income elasticity of demand for rice using point elasticity method. Comment on it.

A packet of cigarettes costs 20 taka and the PED of cigarettes is currently 0.4.  

a) The government wants to reduce smoking by 20%. Using calculations determine by how much should  the government raise the price? 

b) Generally, teenagers tend to have a higher PED for cigarettes than adults. Briefly explain why?

Answer 1

working;

$20000-13000=7000$

$7000\over13000$ $*100=53.85$

Elasticity$=$ %change in quantity demanded /%change in income

= $-10\over53.85$

$=$ $-0.186$

Since the income elasticity of demand is negative ,then this is a normal good.

a)Elasticity= %change in quantity demanded /%change in income

The price elasticity 0.4 implies that change in quantity demanded is proportionately 0.4 times as large as the change in the price percentage reduction in quantity demanded =20%

This implies, percentage reduction in price should be 50% (20/0.4)thus the government should increase the price to 30 taka(150%*20).

b)Youths are more responsive to changes in price than adults.