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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Consider public policy aimed at smoking.

a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs $5 and the government wants to reduce smoking by 20 percent, by how much should it increase the price?

b. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking 1 year from now or 5 years from now?

c. Studies also find that teenagers have a higher price elasticity of demand than adults. Why might this be true?

Subpart (a):

To determine
Percentage change in price.

Explanation

The given price elasticity of demand is 0.4 and the percentage change in price of cigarettes is calculated as follows:

Percentage increase in price=Percentage decrease in quantity deamndedPrice elasticity of demand=200.4=50%

The price should be increased by 50% in order to reduce smoking by 20%

Subpart (b):

To determine
Impact of the policy change on the consumption.

Subpart (c):

To determine
Impact of the policy change on the consumption.

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