Question

a) Steven is a heavy smoker who spend $484 per week on cigarettes. The government decides to levy a 10% tax on all cigarettes, this tax will be completely borne by consumers. After the tax is levied, Steveb's expenditure on cigarettes decreases to $435.60 per week. If each pack of cigarettes sell for $22, calculate Steven's price 1. elasticity of demand for cigarettes and the elasticity of demand for addictive goods. b) If the demand for a good has an absolute price elasticity smaller than one, what wil happen to the total expenditure on the good if its price increases?

Answer 1

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Question b) When the absolute elasticity of demand is less than one, then any increase in price of good will lead to fall in total expenditure of the good by the consumer.

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