Chapter 2, Problem 1QAP

To determine

To explain the consequences of certain events on the US market for tobacco products.

Explanation of Solution

Certain events cause fluctuations in demand and supply curves. The events described involving the unfavorable perception of tobacco products, imposing taxes, lawsuits and supply disruptions in the tobacco industry and substitutes for tobacco products being unattractive.

Economics Concept Introduction

Introduction:

a)

To determine

Shifts in demand due to a change in consumer expectations.

Answer to Problem 1QAP

The demand curve will shift to the right which indicates an increase in demand due to the change in consumer expectations due to the food and drug administration classifying tobacco as an addictive drug.

Explanation of Solution

If there is a scenario where tobacco is classified as an addictive substance by a government authority such as the food and drug administration, it is likely that consumers of tobacco to view this signal and expect prices to increase steeply or expect tobacco products will be difficult to obtain in the future. Accordingly, the demand curve D1 will shift to D2.

  

Economics Concept Introduction

Introduction:

b)

To determine

Shifts in supplyand increase in prices due to imposing an excise tax.

Answer to Problem 1QAP

The supply curve will shift to the left which indicates an increased cost of providing tobacco to the market due to the excise tax.

Explanation of Solution

If there is a scenario where an excise tax is imposed, tobacco producers’ costs will increase, which will result in being unable to supply the product at the same price. Hence the S curve will shift to the left which is denoted by S+ tax. This shift results in an increased price, as well as a reduced quantity, demanded tobacco products.

  

Economics Concept Introduction

Introduction:

c)

To determine

Disruption in supplyand increase in prices due to natural events.

Answer to Problem 1QAP

The supply curve will shift to the left which indicates a reduced supply of tobacco products due to Hurricane Fran.

Explanation of Solution

If there is a supply disruption to resources, caused due to hurricane Fran, tobacco producers’ supply will reduce until the supply disruption is rectified. This will result in being unable to supply the product to the market which will make tobacco products scarce in the market. This scarcity of tobacco products as well as resources creates a price hike. The S curve will shift to the left which is denoted by S2.

  

Economics Concept Introduction

Introduction:

d)

To determine

The impact on tobacco products by producer expectations on future prices and availability.

Answer to Problem 1QAP

The supply curve will shift to the left which indicates a reduced supply of tobacco products due to supplier expectations on likely impositions on availability and prices.

Explanation of Solution

If there is a lawsuit by several states on tobacco producers the tobacco producers will limit supply due to price increases arising from litigation costs as well as taxes or reduced availability on tobacco products through regulations. This will result in tobacco producers reducing their supply to the market. Hence the S curve will shift to the left which is denoted by S2.

  

Economics Concept Introduction

Introduction:

e)

To determine

Shifts in demand due tothe change of the perception on a complement or substitute good.

Answer to Problem 1QAP

The demandcurve will shift to the right which indicates anincreased demand for tobacco products due to coffee being unappealing due to the risk of stomach cancer.

Explanation of Solution

In an event where research finds that a substitute for tobacco, in this case, coffee is harmful, the demand for tobacco products will rise due to consumer perception that coffee is no better than tobacco. This will result in coffee consumers switching to tobacco products and consumers who have limited their tobacco consumption and resorted to coffee switching back to tobacco creating increased demand. Hence the D1 curve will shift to the right which is denoted by D2.

  

Economics Concept Introduction

Introduction: