If the elasticity of demand for cigarettes is 0.75 and the elasticity of supply for cigarettes is 1.25, then a 5 percent decrease in the demand for cigarettes would cause the price of cigarettes to:
A) increase by 2.5 percent.
B) increase by 5 percent.
C) decrease by 2.5 percent.
D) decrease by 5 percent.

Question

Quizplus · Accepted Answer

Using the elasticity formula, % change in price = (elasticity of supply / elasticity of demand) x % change in demand. 
Plugging in the numbers, we get % change in price = (1.25 / 0.75) x (-5) = -8.33% 
Therefore, the price of cigarettes would decrease by 2.5%.

If the Elasticity of Demand for Cigarettes Is 0