Colorado legalized the recreational use of marijuana in 2014 to raise revenues through sales and excise taxes. In Denver, 1/8 ounce of marijuana costing $30 had about $8 in various taxes added on. Assuming a price elasticity of demand for marijuana of –0.7 (see Table 2.3), determine the percentage change in quantity that would result from a price increase of $8. Under what circumstances would prices rise by less than the full amount of a tax? How does the price elasticity of demand affect tax revenues?

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Table 2.3 Demand Price Elasticities for a Variety of Goods Good or Service Hospital Care Physician Care Apples (U.S.) Bread (U.K.) Gas, Short Run (Canada) Cigarettes (U.S.)4 Beer (U.S.)5 Beef (U.K.) Motion Picture Tickets6 Marijuana Price Elasticity -0.14 to -0.17 -0.16 to -0.35 -1.15 -0.26 -0.01 to -0.20 -0.30 to -0.50 -0.20 to -0.40 -1.45 -3.40 -0.67 to -0.79