NEWS WIRE: TAX HIKES AND DEMAND

Oregon Hikes Cigarette Tax by $2

Last November Oregon voters overwhelmingly approved higher taxes on cigarettes and a new tax on e-cigarettes. Effective January 1, 2021, the state tax on a pack of cigarettes jumped from $1.33 to $3.33, the sixth-highest state tax in the nation. That will bring the average retail price up to $8.33 a pack, almost a 32 percent increase. State officials are expecting a tax windfall of $135 million in 2021 from the higher taxes. That assumes Oregonians continue to buy cigarettes at the same rate. Economists warn, however, that smokers reduce cigarette purchases when prices go up. Typically, unit sales decline by 4 percent when cigarette prices go up by 10 percent. The drop in unit sales may be larger in Oregon, as residents will have the option of purchasing smokes from other states, Indian reservations, and online.

Source: Media reports of November 2020-February 2021.

According to the News Wire,

Instructions: Round your responses to one decimal place.

1. by what percentage did the state tax hike cause retail cigarette prices to increase?

%

1. if the price elasticity of demand for retail cigarettes in Oregon is 0.6, by how much will consumption of retail cigarettes decrease because of the tax hike?

%

1. suppose Oregonians can get cigarettes easily online and out of state.

The sale of retail cigarettes in Oregon will decrease by more than the amount calculated in part b.