A state government wants to increase the taxes on cigarettes to increase tax revenue. Because cigarettes are addictive, we would expect its demand to be
A)elastic. Thus, the government's cigarette-tax revenues would rise with a tax increase.
B)elastic. Thus, the government's cigarette-tax revenues would fall with a tax increase.
C)inelastic. Thus, the government's cigarette-tax revenues would fall with a tax increase.
D)inelastic. Thus, the government's cigarette-tax revenues would rise with a tax increase.

Question

Quizplus · Accepted Answer

Cigarettes have an inelastic demand because they are addictive, meaning consumers will continue to buy them even if the price increases. Therefore, when the government increases taxes on cigarettes, it can expect tax revenues to rise because the decrease in quantity demanded will be relatively small compared to the increase in price.

A State Government Wants to Increase the Taxes on Cigarettes