Tobacco industry most increase prices by what percent to reach the target reduction of 60 percent.

Question

In order to reach the target reduction of 60 percent---under a federal tobacco settlement---the tobacco industry must increase prices by _____ percent, given an elasticity of 1.3.

Answer 1

your elasticity figure is misleading, in that it assumes price is the only factor contributing to usage reduction, which is not true. smoking restrictions and health concerns are also major factors. secondly, the price ranges and consumer loyalty vary widely across brands (which affects elasticity), and there are huge price differences across states due to excise taxes.

the settlement agreement does not charge the tobacco comppanies or the states with reducung smoking. it's main purpose was to avoid lengthy and expensive litigation against the cigarette companies by the states-in agreeing to pay $200 billion to the 47 states involved over the next 20 years (plus another 1billion or so to various other sources, including tobacco education groups), the states agreed to halt existing lawsuits and not bring any new ones against the tobacco companies for health-care related damages. while assumed these funds would be used primarily for healthcare and anti-smoking initiatives, most states have spent little to nothing on this. it also placed restrictions on marketing activities by banning billboards and concert and sport sponsorships, amoung other things. the intention here is to limit exposure of tobacco products to minors.

finally, the tobacco companies took a significant price increase soon after the settlement to recoup the costs, but in recent years they have increased prices very little-the huge price increase are the result of state excise tax increases. State tobacco tax revenues have gone from 3.6 billion in 1977 to 15 billion in 2006 despite the steady decline in the market. tobacco is a cask cow for state governments who rely heavily on the revenue-not a good practice.

finally-many statistics on usage are inaccurate-consumption and incidence declines are difficult to measure-some people reduce consumption but don't quit. most data relies on surveys-samples are small and people tend to underestimate the amount they smoke when surveyed. US sales figures do not capture contraband product coming in from overseas, a growing concern as prices skyrocket.

one personal comment-smoking is bad for you-fact. but state governments who are rollling in tobacco tax money while telling people they are bad for smoking and blaming them for a health-care crisis seems a bit duplicitious, huh?

e-mail me if you'd like more info.