Economics help needed
I dont understand where the $3.33 in the answer has come from and how it was calculated
QUESTION - 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?
ANSWER - With a price elasticity of demand of 0.4, reducing the quantity demanded of cigarettes by 20%
requires a 50% increase in price, because 20/50 = 0.4. With the price of cigarettes currently $2, this
would require an increase in the price to $3.33 a pack using the midpoint method (note that ($3.33 –
$2)/$2.67 = .50).
QUESTION - 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?
ANSWER - With a price elasticity of demand of 0.4, reducing the quantity demanded of cigarettes by 20%
requires a 50% increase in price, because 20/50 = 0.4. With the price of cigarettes currently $2, this
would require an increase in the price to $3.33 a pack using the midpoint method (note that ($3.33 –
$2)/$2.67 = .50).
Original post by cacatnebun
I dont understand where the $3.33 in the answer has come from and how it was calculated
QUESTION - 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?
ANSWER - With a price elasticity of demand of 0.4, reducing the quantity demanded of cigarettes by 20%
requires a 50% increase in price, because 20/50 = 0.4. With the price of cigarettes currently $2, this
would require an increase in the price to $3.33 a pack using the midpoint method (note that ($3.33 –
$2)/$2.67 = .50).
QUESTION - 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?
ANSWER - With a price elasticity of demand of 0.4, reducing the quantity demanded of cigarettes by 20%
requires a 50% increase in price, because 20/50 = 0.4. With the price of cigarettes currently $2, this
would require an increase in the price to $3.33 a pack using the midpoint method (note that ($3.33 –
$2)/$2.67 = .50).
Initially when I tried calculating using the formula %change in QD/%change in price, I kept getting $3.00 as the increased price. However, if you read the question again, just as the answer states, 20/50=0.4, so price SHOULD rise by 50%. But if you followed the midpoint formula to calculate price change(new price-old price/average price) using $3 as new price, $2 as old price and $2.5 as average price, the price change is of ONLY 0.4. For the price change to equate to 0.5, your equation should be, x-2/(x+2/2)=0.5 which solves out into x=$3.33.
Was this understandable? Would it make more sense if I wrote it out step by step a bit more clearly?
(edited 4 years ago)
Quick Reply
Related discussions
- A-level choices
- alevel econ resources
- Economics and Business for ALevel
- Economics vs Finance
- Should I get an Economics degree?
- medicine with only chemistry a level?
- Econ/finance
- Do I need to do economics a level for accounting
- Things I can do for economics course at uni without doing at a level
- Help to go from BBBA to AAAA
- Help me choose my degree for uni
- Choosing IB subjects
- economics or computer science
- Help me choose my degree
- Economics or Economics and Politics?
- Economics Undergraduate at Oxbridge
- How much maths is there in an Economics undergraduate course?
- A level and university advice
- Help - Stuck on A Level Choices. Physics Maths Economics and/or Biology
- accounting and finance or economics
