The case:
Despite the fact that tobacco is banned in public places, tobacco smoking in Pakistan is
common and one of the highest in South East Asian region. According to Pakistan
Demographic Health Survey, 46% men and 5.7% women smoke tobacco. This habit is
thought to be responsible for various health problems and deaths in the country. On
average, Pakistanis use to spend Rs.56 million every day in smoking. Suppose the price
and quantity demanded of tobacco is:
Price (Rupees) Quantity demanded of tobacco
(billion)
1 21
3 19
5 17
8 15
As tobacco causes eighteen types of cancers, heart diseases and different other
diseases, measures should be taken to reduce its usage. There is a need of effective
implementation of the existing laws along with necessary amendments in them.
Moreover, Government is planning to implement new taxes on tobacco products in
coming budget.
Requirements:
A. From the data given above, draw demand curve of tobacco.
B. Calculate price elasticity of demand for tobacco when price is between 1 and 3
by using arc elasticity method.
C. Suppose government has hired you as a member of tax commission to decide
whether tax should be levied on tobacco or not. Would elasticity of demand
calculated above be helpful to you in making this decision? Discuss.
(Marks = 5+5+5)
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