if a pack of cigarettes currently costs $5 and the government wants to reduce smoking by 10%, it should increase the price by [ select ] .

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10-11-2022
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if a pack of cigarettes currently costs $5 and the government wants to reduce smoking by 10%, it should increase the price by [ select ] .

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Qwline Qwline · Answer 1 · 2022-11-16T17:04:22+01:00

The government should increase the price by 22.22% to reduce smoking by 10%

Price elasticity of demand (PED) is a measure of how responsive demand is to a change in the price of a good. It is calculated as the percentage change in the quantity demanded divided by the percentage change in the price:

[tex]{}PED = \frac{\%\Delta{Q_d}}{\%\Delta{P}}\\ {}[/tex]

If a pack of cigarettes currently costs $5 and the government wants to reduce smoking by 10%, it should increase the price by 15%. The PED is typically measured in absolute terms because it is always assumed to be negative (because of the law of demand). So for simplicity, the negative was applied to the PED from the equation above.

[tex]{}PED = \frac{\%\Delta{Q_d}}{\%\Delta{P}}\\ -0.9 = \frac{-10}{\%\Delta{P}}\\ \%\Delta{P} = \frac{-20}{-0.8}\\ \%\Delta{P} = 22.22 {}[/tex]

So, the percentage change in price = 22.22%

Learn more about elasticity of demand:

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