chapter 6 problem 3 According to Professor Becker Newsp 123

chapter 6 problem 3- According to Professor Becker (News,p. 123), by how much would cigarette prices have to rise to get a 20 percent reduction in smoking in a)one year? b)three years? From book The Micro Economy Today 13e.

Solution

(a) Cigarette consumption drops 4 percent for every 10 percent increase in price in the first year, so to achieve a 20 percent reduction in smoking in one year, there must be a 50 percent increase in price (4% x 5 = 20%; 10% x 5 = 50%).

(b) Over a three year period, cigarette consumption drops 8 percent for every 10 percent increase in price, so to achieve a 20 percent reduction in smoking in 3 years, there must be a 25 percent increase in price (8% x (20/8)% = 20%; 10% x (20/8)% = 25%)