Consider public policy aimed at smoking
a.) Studies indicate that the price elasticity of demand for cigarettes currently costs $2 and the government wants to reduce smoking by 20%, 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 than do adults. Why might this be true?
a.) To determine by how much the price should be increased, we need to use the concept of price elasticity of demand, which measures how responsive the quantity demanded of a good is to a change in its price. The formula to calculate price elasticity of demand is:
Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price
In this case, we know that the price elasticity of demand for cigarettes is $2, which means that for every 1% increase in price, the quantity demanded decreases by 2%. The goal is to reduce smoking by 20%, so we can calculate the percentage increase in price as follows:
Percentage increase in price = (Percentage decrease in quantity demanded / Price elasticity of demand) * 100
= (20 / 2) * 100
= 1000
Therefore, the price of cigarettes should be increased by 1000%.
b.) The long-term effect of a policy that permanently increases the price of cigarettes will likely have a larger impact on smoking 5 years from now compared to 1 year from now. This is because as time passes, people have more opportunity to adjust their behavior and adapt to the new price. Initially, the immediate effect of the price increase may cause a noticeable reduction in smoking, but over time, individuals may find alternatives or develop coping mechanisms to deal with the higher prices. Thus, the effectiveness of the policy is likely to diminish over time.
c.) Teenagers having a higher price elasticity than adults means that they are more responsive to changes in price. There are a few reasons why this might be true:
1. Limited disposable income: Teenagers generally have lower income compared to adults and a limited budget. This makes them more sensitive to changes in price. When prices increase, teenagers may find it harder to afford cigarettes and may cut back on their consumption or find alternatives.
2. Lack of addiction: Teenagers are less likely to be addicted to cigarettes compared to adults. This lack of addiction means that they are more likely to respond to price increases by choosing not to start smoking or by quitting altogether.
3. Social norms and peer pressure: Teenagers are heavily influenced by social norms and peer pressure. If higher prices are accompanied by strong anti-smoking messages and a shift in social norms against smoking, teenagers may be more likely to change their behavior in response to price increases compared to adults who have already established smoking habits.
Overall, the combination of limited disposable income, lower addiction rates, and susceptibility to social influences contributes to teenagers having a higher price elasticity than adults when it comes to smoking.
a) you did not provide an elasticity
b) you did not provide a short run vs long-run elasticity.
c) take a shot, what do you think? Hint: are people with lots of money more likely or less likely to be sensitive to changes in cigarette prices.