According to a study by the U.S. Centers for Disease Control and Prevention, the price elasticity of demand for cigarettes is 20.25. 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.