Consider public policy aimed at smoking.
a. Studies indicate that the price elasticity of demand for cigarettes is about 0.3. If a pack of cigarettes currently costs $5 and the government wants to reduce smoking by 20 percent, 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 of demand than adults. Why might this be true?
a. To calculate how much the government should increase the price of cigarettes, we need to use the formula for price elasticity of demand:
Price elasticity of demand = (% change in quantity demanded) / (% change in price)
In this case, the price elasticity of demand for cigarettes is given as 0.3. The government wants to decrease smoking by 20%, which represents the percentage change in quantity demanded. We need to find the percentage change in price that would correspond to a 20% decrease in quantity demanded.
Let's assume the initial price of cigarettes is $5. We need to calculate the percentage increase in price that will lead to a 20% decrease in quantity demanded:
0.3 = (-20%) / (% change in price)
Cross-multiplying, we get:
0.3 * (% change in price) = -20%
Simplifying, we have:
(% change in price) = (-20%) / 0.3
(% change in price) = -66.67%
Therefore, the government should increase the price of cigarettes by approximately 66.67% to achieve a 20% reduction in smoking.
b. In general, the effect of a price increase on smoking behavior tends to be larger in the short run than in the long run. In the short run, people may find it more difficult to immediately adjust their behavior in response to the price increase. However, over time, individuals may adapt to the higher price, find alternatives, or quit smoking altogether.
Therefore, the policy will likely have a larger effect on smoking one year from now compared to five years from now.
c. Teenagers tend to have a higher price elasticity of demand compared to adults for several reasons:
1. Limited incomes: Teenagers generally have lower incomes and fewer resources compared to adults, making price increases more significant to them. They may be more sensitive to price changes as they have less disposable income to spend on cigarettes.
2. Lack of addiction: Teenagers are less likely to be addicted to smoking compared to adults. As a result, they may be more likely to quit or reduce their smoking if the price increases, as they are less dependent on the habit.
3. Social norms: Teenagers are more susceptible to social influences and perceptions. If the price of cigarettes increases, it may lead to a change in social norms and attitudes towards smoking among their peer group, making it less desirable or acceptable.
4. Long-term health concerns: Teenagers may be more responsive to price increases due to increased awareness of the long-term health consequences associated with smoking. This knowledge makes them more likely to react to changes in price compared to adults who may already be more set in their smoking habits.
Overall, these factors contribute to teenagers having a higher price elasticity of demand for cigarettes compared to adults.