The government is thinking about increasing the cigarette tax to raise additional revenue, rather than to discourage consumption. The tax will result in the greatest amount of tax revenue if the price elasticity of demand for cigarettes equals
A) 1.8
B) 1.4
C) 1.0
D) 0.5

Question

Quizplus · Accepted Answer

When the price elasticity of demand is inelastic (less than 1), such as 0.5, consumers are less responsive to price changes, meaning they will continue to buy cigarettes even after a price increase. This results in higher tax revenue.

The Government Is Thinking About Increasing the Cigarette Tax to Raise