Question

Consider public policy aimed at smoking.

Answer 1

Answer:

1. government shoud increase price by 50%. so it would be $3

2. larger effect 5 years from now

3. this is true due to their limited finance compared to adults

Explanation:

1. prices elasticity = % change in quantity demanded ÷ % change in price

price elasticity = 0.4

% change in dmd = 20%

% change in price = ?

$0.4=\frac{0.20}{?}$

we cross multiply

? = 0.20/0.4

= 0.5

= 50%

so if the government wants to reduce smoking by 20%, it has to increase the price of cigarettes by half of its price= $2 + $1 = $3

2. goods usually have more elastic demand as time goes on. So if cigarette price is permanently raised, it would have a bigger effect five years from now. This is based on the fact that the people may not feel short run effect of the increase as they would in the long run. But gradually given this increase, people may start to gradually reduce their smoking.

3. The effect of the change in price would be more felt on the teenagers. this is due to the fact that they have limited financial strength compared to adults. Also they are new to smoking compared to the adults and are more likely to be less involved in the habit.