Question

A state government wants to increase the taxes on cigarettes to increase tax revenue. Because cigarettes are addictive, we would expect its demand to be: ______________
a. Elastic, Thus, the government's cigarette-tax revenues would rise with a tax increase.
b. Elastic, Thus, the government's cigarette-tax revenues would fall with a tax increase.
c. Inelastic, Thus, the government's cigarette-tax revenues would rise with a tax increase.
d. Inelastic, Thus, the government's cigarette-tax revenues would fall with a tax increase.

Answer 1

The demand of cigarette is elastic so the government's cigarette-tax revenues would rise with a tax increase.

The demand of cigarette is elastic because of the addiction the people can buy the cigarette even at high prices and the government's cigarette-tax revenues would rise.

The demand for cigarettes is unitary elastic (−1.06) means that a 1% increase in the price of cigarette would reduce its consumption by 1.06% so we can conclude that the demand of the cigarette is elastic and the government revenues increases.

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