Chapter 9R, Problem 10MCQ

To determine

The elasticity of cigarette demand if the government levied a tax of $0.50 on buying cigarettes where the price elasticity of demand is 1.2 and the price elasticity of supply is 0.7.

Explanation of Solution

In this example, the demand for cigarette is elastic because increase in price of cigarettes leads to decrease in demand of cigarettes. Here, the value of elasticity of demand is greater than one which is more than the elasticity of supply.

Therefore, the correct option is e.

Economics Concept Introduction

Introduction:

Elasticity of demand represents the measure of sensitivity of demand to price that shows how change in price or supply of goods affects the quantity demanded.