Question

What are the likely consequences on the U.S. market for tobacco products for each of the events listed below? Which curve shifts, supply or demand? Please indicate the direction of shift. State whether the equilibrium price and quantity would increase, decrease, or stay the same. Show the changes using a standard diagram with an upward slopping supply curve and a downward slopping demand curve.

a. The food and drug administration classifies tobacco as an “addictive substance.”

b. The congress votes to raise the excise tax on all tobacco products.

c. Hurricane Fran dumps 15 inches of rain on North Carolina and destroys 80 percent of that state’s tobacco crop.

d. Sixteen states sue the major tobacco companies for billions of dollars because of tobacco related costs in their Medicaid programs.

e. Medical evidence that more than two cups of coffee a day, considered by many to be a substitute for smoking, greatly increases the risk of stomach cancer.

NOTE: According to the book, even addicts tend to decrease their consumption of products.

Answer 1

a)

The demand curve shifts to the left from D to D₁. The equilibrium price decreases from p to p₁. The equilibrium quantity decreases from q to q₁. The equilibrium price and quantity decrease.

b) When an excise duty is imposed on the sellers, then the cost of production of goods increase and the supply curve shifts to the left. The equilibrium price increases and quantity falls.

c)

The supply curve shifts to the left due to the heavy rain. The equilibrium price increases and quantity falls.

d)

The supply curve shifts to the left due to the left. The equilibrium price increases and quantity falls.

e) Demand for tobacco will increase. The demand curve shifts to the right. The equilibrium price and quantity will increase.

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