Question

Prior to the 1997 federal tobacco settlement a pack of cigarettes sold for $2.48. The terms of the settlement required a decrease in teenage smoking of 60 percent. If the elasticity of cigarette demand for teenagers is about 1.3 then the price of cigarettes should rise to __________ in order to achieve the target reduction of 60 percent.

Answer 1

Answer:

$3.62

Explanation:

Elasticity of demand = percentage change in quantity demanded/ percentage change in price

1.3 = 60% / percentage change in price

Percentage change in price = 60/1.3

=46.15%

Price has to rise by 46.15% or 0.4615

0.4615 = (x - 2.48) / 2.48

1.14 = x - 2.48

X = 3.62

Price has to rise to $3.62 to achieve a 60% reduction.

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