Answer to Question #53775 in Economics of Enterprise for Abdulaziz Mohammed
a. Consider public policy aimed at smoking;
i. 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?
ii. Studies also find that teenagers have higher price elasticity than do adults. Why
might this be true?
b. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:
Price Quantity Demanded Quantity Demanded
(business travelers) Quantity Demanded
$200 2,000 tickets 800 tickets
$250 1,900 tickets $ 600 tickets
$300 1,800 tickets 400 tickets
As the price of tickets rises from $200 and $250, what is the price elasticity of demand for
(i) business travellers and (ii) vacationers? (Use the midpoint method in your calculations)
ii. Why might vacationers have a different elasticity from business travellers?