Discussion
The price elasticity of demand for addictive products like cigarettes and alcohol would be ...........
Answer: B
The price elasticity would be less than 1.
Addictive products are consumed out of habit or dependence, so consumers keep buying them when prices rise. The proportionate fall in quantity is smaller than the proportionate rise in price, which means demand is inelastic, with elasticity less than one. This is why governments can raise large revenue from taxes on tobacco and alcohol.
Elasticity greater than one or infinite would mean consumers cut back sharply or switch entirely, and unitary elasticity would mean spending stayed constant, none of which fits addictive goods.
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