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15 September, 02:54

Studies indicate that the price elasticity of demand for cigarettes is about - 0.4. If a pack of cigarettes currently costs $2, and the government wants to reduce smoking by 20 percent, by how much should it increase the price?

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  1. 15 September, 03:20
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    Government should increase the price by $1

    Explanation:

    Use Price elasticity formula to calculate the percentage change in price.

    Price elasticity = % Change in demand / %Change in price

    - 0.4 = 20% / %Change in price

    %Change in price = - 20% / 0.4

    %Change in price = - 50%

    So the government has to increase the price by 50%.

    Current Price = $2

    Increase in Price = $2 x 50% = $1
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