It has been estimated that the price elasticity for cigarettes is 0.164. Assuming there are currently no taxes on cigarettes, to reduce cigarette purchases by 5 percent, the government would need to tax cigarettes enough to:
A) raise the price by 0.82 percent.
B) lower the price by 0.82 percent.
C) raise the price by 30.5 percent.
D) lower the price by 30.5 percent.

Question

Quizplus · Accepted Answer

Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. To reduce cigarette purchases by 5 percent with an elasticity of 0.164, the price must be increased by 5 / 0.164 = 30.5 percent.

It Has Been Estimated That the Price Elasticity for Cigarettes