Question

The price for cigarettes sold by Big Tobacco Co Ltd was 6.00 per packet in March 2018. During the month of March, the consumption of cigarettes was 1000 packets. However, the Board of Directors of Big Tobacco Co Ltd decided to increase the price by 25% during the month of April.  As a manager you noted that price elasticity of demand was 0.8. As a manager Big Tobacco Co Ltd:

1. Advise your management of the strategy that could be adopted by your firm to maintain sales.

2. Also, advise your government on recommended interventions in the cigarette market.                                                                                                     

Answer 1

GIven the information

P1 = 6.00

Q1 = 1000

increases price bt 25% meaning that :

P2 = P1*(1+0.25)

P2 = 7.5

Price elasticity of demand (E) = 0.8

We know that

In this way government can increase revenue from tax

Thanks