Question

Distributors of cigarettes earn some monopoly profits in their local markets but see them slowly erode as substitutes enter the market. Suppose Nebraska has scheduled a vote on the legalization of marijuana. Additionally, suppose that marijuana and cigarettes are substitutes and that the legalization of marijuana would lead to a decrease in the price of marijuana.

Given the relationship between marijuana and cigarettes, the legalization of marijuana would lead to_______(an increase/a decrease) in demand for cigarettes. Thus, distributors of cigarettes would likely____(Support/oppose) the legalization of marijuana.

Answer 1

When two goods are the substitute to each other, Decrease in price of one good lead to decrease demand for other good. As people prefer to buy the cheap good. Again increase the price of one good lead to increase demand for other good as now the second good is cheap.

Here cigarettes and marijuana are substitutes. The decrease in the price of marijuana leads to decrease in demand for cigarettes. Thus, distributors of cigarettes would likely oppose the legalization of marijuana.