Assume a price elasticity of demand of 0.50.If the tobacco lobby is successful in reducing a tax on the price of cigarettes by 10 percent,the quantity demanded will:
A) Decrease by 5 percent.
B) Decrease by 2 percent.
C) Increase by 5 percent.
D) Increase by 2 percent.

Question

Quizplus · Accepted Answer

If the price elasticity of demand is 0.50 (which is inelastic), a 10% reduction in the price of cigarettes will lead to a 5% increase in the quantity demanded (which is half of the percentage reduction in price). Therefore, the correct choice is C - an increase of 5%.

Assume a Price Elasticity of Demand of 0