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November 26, 2014

Homework Help: Microeconomics-Algebra Calculation

Posted by GG on Wednesday, December 5, 2007 at 1:25pm.

Consider public policy aimed at smoking.
Studies indicate that the price elasticity of demand for cigarettes in about 0.4. If a pack of cirarettes currently costs $2 and the government wants to reduce smoking by 20 percent, by how much should the govenment increase the price?

Answer in suppose to be $3.33. When I try to calculate using formulate I can not get the answer.

Formula is:

P2-P1
_________

(P2+P1)/2

I got some of the calulation:

Percentage change in P=

.20 Quantity/.4 Price Elasticity of Demand = 0.5

P2-2
_______ = 0.5

(P2+2)/2

I have tried the calculation several ways and I can not arrive at the answer of $3.33.

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