Question

20. A 2014 paper by Grace et al. estimated that the cross-price elasticity between e-cigarettes and traditional cigarettes is .16 in their sample of New Zealand smokers. Suppose the New Zealand government wishes to reduce smoking (both traditional cigarettes and e-cigarettes) through higher excise taxes on traditional cigarettes. What are the implications of the estimated cross-price elasticity on the effectiveness of the tax policy? a. E-cigs and cigarettes are estimated to be substitute goods. This relationship increases the cigarette tax's effectiveness at reducing smoking. b. E-cigs and cigarettes are estimated to be substitute goods. This relationship decreases the cigarette tax's effectiveness at reducing smoking. c. E-cigs and cigarettes are estimated to be complementary goods. This relationship increases the cigarette tax's effectiveness at reducing smoking d. E-cigs and cigarettes are estimated to be complementary goods. This relationship decreases the cigarette tax's effectiveness at reducing smoking.

Answer 1

Option A

Explanation: Their cross-price elasticity is positive. This means the goods are substitutes. So, when the price of traditional cigarettes increases, the quantity demanded for the e-cigarettes would rise.