The price elasticity of demand for cigarettes is 0.4. If government wants to reduce smoking by 10 percent, by how much should it raise the price of cigarettes by imposing a tax?
A) by 10 percent
B) by 20 percent
C) by 25 percent
D) by 50 percent

Question

Quizplus · Accepted Answer

The price elasticity of demand formula is: % change in quantity demanded = elasticity * % change in price. To achieve a 10% reduction in smoking with an elasticity of 0.4, the price must increase by 25% (10% / 0.4 = 25%).

The Price Elasticity of Demand for Cigarettes Is 0