The Constant Elasticity of Demand for Cigarettes Has Been Estimated

question 1

Multiple Choice

The constant elasticity of demand for cigarettes has been estimated to be 0.5.To reduce smoking by 75%, approximately how much tax needs to be added to a $1 pack?

• A)$.38.
• B)$.75.
• C)$1.50.
• D)$2.25.
• E)$4.

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Definitions:

Price of Good

The monetary value assigned to a product or service, determined by various factors including production costs, supply and demand, and competition.

Giffen Good

A product that people consume more of as the price rises, violating the basic law of demand.

Substitution Effect

The change in consumption patterns due to a change in the relative prices of goods or services.

Indifference Curve

A chart illustrating diverse pairings of two items that offer the same level of contentment and usefulness to a shopper.