Suppose the Tasmanian state government is considering imposing additional taxes on cigarettes to curb health related problems. Assume there is no interstate trade of cigarettes. You have been hired by the state government to provide some analysis of the proposed policy.
a) Previous studies indicate that the price elasticity of demand for cigarettes is 0.4. If a packet of cigarettes currently costs $8 and the government wants to reduce smoking by 20 percent, by how much should it increase the price?