Question

Suppose the price elasticity of demand for cigarettes is less than one. When an excise tax is imposed on cigarette production, it changes the price, quantity, and consumer spending in which of the following ways?:

a) Price increases, quantity decreases, and consumer spending increases
b) Price decreases, quantity increases, and consumer spending decreases
c) Price increases, quantity decreases, and consumer spending decreases
d) Price decreases, quantity increases, and consumer spending increases

Answer 1

When the price elasticity of demand is less than one, an excise tax on cigarettes increases the price, decreases the quantity, and decreases consumer spending.

Step-by-step explanation:

When the price elasticity of demand for cigarettes is less than one, it indicates an inelastic demand. This means that consumers are not very responsive to price changes and the quantity demanded reduces only modestly when a tax is introduced.

Therefore, when an excise tax is imposed on cigarette production, the price of cigarettes increases. However, the decrease in quantity demanded is not significant, resulting in a decrease in consumer spending on cigarettes.

The correct answer is c) Price increases, quantity decreases, and consumer spending decreases.