Question

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?

Answer 1

Answer:

Government should increase the price by $1

Explanation:

Use Price elasticity formula to calculate the percentage change in price.

Price elasticity = % Change in demand / %Change in price

- 0.4 = 20% / %Change in price

%Change in price= - 20% / 0.4

%Change in price= - 50%

So the government has to increase the price by 50%.

Current Price = $2

Increase in Price = $2 x 50% = $1