According to a study by the U.S. Centers for Disease Control and Prevention, the price elasticity of demand for cigarettes is -0.25. Americans purchase about 360 billion cigarettes each year.
a. If the federal tax on cigarettes were increased enough to cause a 50 percent increase in the price of cigarettes, what would be the effect on the quantity of cigarettes demanded?
b. Is raising the tax on cigarettes a more effective way to reduce smoking if the demand for cigarettes is elastic or if it is inelastic? Briefly explain. Source: "Response to Increases in Cigarette Prices by Race/Ethnicity, Income, and Age Groups-United States, 1976-1993," Morbidity and Mortality Weekly Report, July 31, 1998.