Studies indicate that the price elasticity of demand for cigarettes is about 0.5
ID: 1146113 • Letter: S
Question
Studies indicate that the price elasticity of demand for cigarettes is about 0.5. If a pack of cigarettes currently costs $4 and the government wants to increase the price to $6 per pack.
Then, how much would the demand of cigarettes decline in relative term (or in %)?
2.1 What is the price change in relative term (Rel_Prc_Chg), using the mid point method?
2.2 What should be the change in quantity demanded in relative term (Rel_Qty_Chg), to get the price elasticity of 0.5?
Price Elasticity of Demand = 0.5 = - (Rel_Qty_Chg / Rel_Prc_Chg) ---> Rel_Qty_Chg = - 0.5 * Rel_Prc_Chg
Rel_Prc_Chg = (6-4)/[(4+6)/2] =Explanation / Answer
1 Demand will decline to 0.5(6-4)=1%every 2% rise in price decline quantity demanded by 1%
2 (6-4)/4+6/2=2/5=0.4
3 0.5 multiplied by relative price change(calculated in 2)=0.5(0.4)=0.2