The constant elasticity of demand for cigarettes has been estimated to be 0.5.To reduce smoking by 25%, approximately how much tax needs to be added to a $1 pack?
A)$.50.
B)$.75.
C)$.25.
D)$.13.
E)$4.

Question

Quizplus · Accepted Answer

The elasticity of demand is 0.5, meaning a 1% increase in price leads to a 0.5% decrease in quantity demanded. To achieve a 25% reduction in smoking, prices need to increase by 50% (25% / 0.5). A 50% increase on a $1 pack is $0.50.

The Constant Elasticity of Demand for Cigarettes Has Been Estimated