Taxing Tobacco According to the law of demand, taxes that increase the price of a product are expected to reduce consumption of the product. Several years ago, California increased its cigarette tax by $.25 a pack; by the next year, cigarette purchases in California had declined by 10 percent. For simplicity, assume that all of this decrease was caused by the price of cigarettes increasing $.25 as a result of the tax increase.

Use this information to answer the following questions.

1. Cigarettes back then cost $1 per pack before the tax increase and $1.25 after. The demand elasticity for cigarettes over this price range is

. Demand for this product is (elastic,inelastic).

2. Use the determinants of demand elasticity discussed in Section 3 of the chapter to explain why you would expect the demand for cigarettes to be inelastic.