The Price Elasticity of Demand for Cigarettes Is 0

question 465

Multiple Choice

The price elasticity of demand for cigarettes is 0.4. If government wants to reduce smoking by 10 percent, by how much should it raise the price of cigarettes by imposing a tax?

• A) by 10 percent
• B) by 20 percent
• C) by 25 percent
• D) by 50 percent

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Definitions:

Fixed Costs

Fixed costs are business expenses that remain constant regardless of the level of production or sales, such as rent, salaries, and insurance premiums.

Unit Contribution Margin

Unit contribution margin is the difference between the selling price of a product and the variable costs associated with its production and sale.

Profit

The difference between the amounts received from customers for goods or services provided and the amounts paid for the inputs used to provide the goods or services.

Contribution Margin Ratio

A measure that calculates the portion of sales revenue that exceeds variable costs, expressed as a percentage.