Answer to Question #309542 in Microeconomics for Fahrul Iqbal

Question

Are cigars substitutes or complements for cigarettes?

b. Using a supply and demand diagram, show what happens in the markets for cigars if the tax on cigarettes is increased.

c. If policymakers wanted to reduce total tobacco consumption, what policies could they combine with the cigarette tax?

Answer 1

Answers

(a) Cigars and cigarettes are substitute goods since the can both be used to satisfy the same need.

(b) An increase in the tax on cigarettes will lead to rise in their price. This will lead to fall in their demand and an increase in the demand for cigars since they are substitute goods. This will shift the demand curve of cigars to the right and lead to an increase in both price and quantity demanded.

(c) In addition to the increased taxation policy makers might introduce and enforce laws regulating the purchase cigarettes such as; how and where they can be purchased, who can purchase them and where and when they can be used.