question archive b) In a hypothetical situation, Government of Pakistan wants to put a curb on cigarette smoking through economic policy: i
b) In a hypothetical situation, Government of Pakistan wants to put a curb on cigarette smoking through economic policy: i
Subject:EconomicsPrice:2.86 Bought3
b) In a hypothetical situation, Government of Pakistan wants to put a curb on cigarette smoking through economic policy: i. Studies indicate that the price elasticity of demand for cigarettes is about 0.5. If a pack of cigarettes currently costs Rs.200 and the government wants to reduce smoking by 22 percent, by how much should it increase the price? (1 Marks) ii. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or five years from now? (1 Mark) iii. Studies also find that teenagers have a higher price elasticity of demand than adults. Why might this be true? (1 Mark)
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i)
Ed = % change in quantity demanded / % change in price
0.5 = 22 / % change in price
% change in price = 22/0.5
% change in price = 44 %
Price needs to be increased by 44 % or ? 88 to the desired fall in quantity.
ii)
Larger impact of price rise will be felt more after 5 years and demand is more elastic in long run than in short run. People search for the alternatives in long run.
iii)This might be true because
- Teenagers have limited source of income such as pocket money that is why they will demand less at increased price
- They have greater number of restrictions on their activities from different sources. This also makes their demand more elastic.
