According to a study by the US Centers for Disease and Contr

According to a study by the U.S. Centers for Disease and Control and Prevention, the price elasticity of demand for cigarettes is -0.25. Americans purchase about 360 billion cigarettes each year.

A. If the federal tax on cigarettes were increased enough to cause a 50 percent increase on the price of cigarettes, what would be the effect on the quantity of cigarettes demanded?

B. Is raising the tax on cigarettes a more effective way to reduce smoking if the demand for cigarettes is elastic or if it is inelastic? Briefly explain.

Solution

Req A: Price elasticity of demand of cigarettes:   -0.25 Demand = 360 billion % change in price: 50% Therefore, Price elasticity of demand = % Change in demand / % change in price (-0.25) = % change in demand/ 50% % change in demand = -12.50% The demand of Cigarettes will decraese by 12.50%. Therefore, new demand is equal to 315 billion cigarettes Req B: The more effective of raising tax for reducing smoking is when the demand is Elastic. That means, with the slight increase in prices and the demand for cigarettes decreases manyfold which resulted in reducing the smoking habits.