policy aimed at smoking
Studies indicate that the price elasticity of demand for cigarettes is about -0.40. If a packet of cigarettes currently costs $35 and the Australian Government wants to reduce smoking by 20%, by how much should it increase the price?
Homework Answers
Answer: $17.50 tax
Proof:
x = change in price necessary
PED = (% change in demand)/(% change in price)
-0.40 = (-20%)/(x)
x = 50%
$35 * 50% = $17.50
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