Suppose the price elasticity of demand for addicts of a drug is 0.11 and 3.46 for casual users. If the government legalized the drug and then implemented a tax on it so that its price rose, expenditure by addicts would _ _ _ _ _ _ _ _ and expenditure by casual users would _ _ _ _ _ _ _ _ .

increase; decrease

decrease; increase

decrease; decrease

not change; decrease

increase; increase

The correct answer is: increase; decrease

The expenditure by addicts will increase because they cannot live without consuming the drug. Thus, they have to incur more to buy the drug; their price elasticity is more than one (3.46), meaning that its demand elastic. This will cause them to decrease consumption of other goods and services and consume that drug since it is a necessity to them. On the other hand, the expenditure for the casuals will decline because the drug is not a necessity to them. Their price elasticity is (0.11), meaning its demand is less than one (meaning their demand for the drug is inelastic). Thus, they choose to forgo its consumption.