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1. The cigarette taxes are a way to reduce smoking. Now think about the markets for...

1. The cigarette taxes are a way to reduce smoking. Now think about the markets for other tobacco products such as cigars and chewing tobacco. a. Are these goods substitutes or complements for cigarettes

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Answer #1

Cigarettes are taxed so that the aggregate demand for cigarretes goes down since it is a demerit good (as it does harm due to consumption). However, cigarettes have close substitues such as the aforementioned- cigars and chewing tobacco. The contents of both these products are extremely similar to that of cigarettes and thus they can be consumed in place of cigarettes since the price of cigarettes is higher due to the tax imposed on them.

Complements are those goods which are used to complement another good i.e. to consume together. An example of complements is sugar and coffee. However, in our case, we have a case of substitutes with cigs and tobacco products.

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