A recent economic study predicts that a $0.25 per pack increase in the price of cigarettes will reduce teen smoking by 20% and adult smoking by only 5%. The average retail price of cigarettes is currently $1.75.

Estimate and interpret the elasticity of demand for cigarettes by teen smokers and again for adult smokers.

The overall elasticity of demand for cigarettes at the retail level (adult + teen) is -0.5 (h  = -0.5) and the elasticity of supply is 3 (e = 3). How much of a tax will be needed to get the retail price to rise by $0.25?

Remember that the buyers' and sellers' shares of a tax are: