A-AS Level (CIE) Business Studies Paper-2: Specimen Questions with Answers 3 - 4 of 52

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Case Study- 3

Tobacco products are kind of goods with inelastic demand since there is almost no substitute goods for them. Therefore, it is hard to reduce the amount of people smoking once they have been addicted. Moreover, cigarettes also have a high-income elasticity of demand as people with high income will be willing to buy a lot more of packs of cigarettes, thus, they become more addicted.

One way to reduce youth smoking and people smoking in general is to raise the price through higher cigarettes taxes. The reduction amount of youth smoking depends on the price elasticity of demand. This elasticity is elastic for teenagers than for adults. It is because teenager income is relatively low, the portion spent on cigarettes usually bigger than that of adult smokers. In addition, peer pressure affects a young person՚s decision to smoke more than an adult՚s decision to continue smoking. The impact of a higher price also reduces smoking by peers and thus, drives down the number of young smokers. Moreover, young smokers not yet addicted to nicotine are more sensitive to price rises than adults, who are likely to be heavy smokers. The experience from other countries encourages the efficiency of higher cigarette taxes in reducing people smoking. For example, Thailand government has regularly raised the cigarettes taxes nine times within 15 years (1992 - 2007) and recently, the amount of tax collected is 2 - 3 times more than Vietnam and the number of smokers is two-thirds less than Vietnam.

Question 3 (3 of 5 Based on Passage)

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Short Answer▾

What is point elasticity of demand how it is measured?

Explanation

Point elasticity is measured at a point demand curve is referred as point elasticity of demand. For non-linear demand curve we need to apply calculus to calculate point elasticity. As the change in price become smaller and approach zero, the ratio ∆ Q/ ∆ P becomes equivalent to the first order derivative of the demand curve function with respect to price .

Point elasticity can be expressed as: Lower segment/Upper segment

Question 4 (4 of 5 Based on Passage)

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Essay▾

How high prices will reduce smoking among the young smokers?

Explanation

Tobacco is the Reason for a Few Diseases Such As

  • Cancer
  • Lung
  • Cardiovascular diseases

A fundamental concept of economic theory is that high prices causes reduction the quantity demanded by the buyer. Smoking habits can be reduced by implementing strategies to tighten the tobacco policies especially among young people as they are more sensitive towards rise in prices than the adults and young smokers earn low wages and are also occasional smokers as compared to adults. Such strategies are-

  • Increase in the taxation rate on tobacco is the most effective and inexpensive tool in reducing smoking among young smokers.
  • Increasing prices has been used to decrease the demand for tobacco.
  • Restrictive smoke free environmental laws
  • Plain packaging

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