Question

The New York state cigarette tax applies equally to low-quality (generic) and high-quality cigarettes. However, the state cannot collect the tax on sales on Indian reservations. DeCicca et al. (2014) found that people purchase a larger share of low-quality cigarettes on Indian reservations compared to purchases elsewhere in New York. Why? People purchase a larger share of low-quality cigarettes on Indian reservations (compared to purchases elsewhere in New York) because A. low-quality cigarettes are relatively cheaper there without state cigarette taxes. O B. low-quality cigarettes are inferior goods. C, low-quality cigarettes are more likely to be substitutable for high-quality cigarettes there. D. consumers have relatively more purchasing power on Indian reservations. E. consumers have less income on Indian reservations. Let the price of low-quality cigarettes be p1,the price of high-quality cigarettes be p2, and the per-pack cigarette tax be t. As a function of p1. P2, and t, the ratio of the price of low-quality cigarettes to high-quality cigarettes on Indian reservations is and the ratio of the price of low-quality cigarettes to high-quality cigarettes off reservations with taxes is

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People purchase a larger share of low quality cigarettes on Indian reservations (compared to purchases elsewhere in New York) because the consumers have less income on Indian reservations. We can say this because the people will buy low quality cigarettes because they cannot afford the high quality cigarettes due to their low income. And we cannot say that low quality cigarettes are relatively cheaper there without cigarette taxes as the taxes levied were equal for both high and low quality cigarettes. So option E is the correct answer.

The ratio of price of low quality cigarettes to high quality cigarettes on Indian reservations is p1/p2. As there are on taxes in Indian reservations t will not be considered.

The ratio of low quality cigarettes to high quality cigarettes off reservations with taxes is (p1+t)/(p2+t).

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