Question

Background Information:

A tax on Cigarettes introduced in Mexico in 2014 increased the price of Cigarettes by about 10%. An evaluation of the first two years of this measure found that Cigarette consumption fell on average by 7.6%, with a larger decrease (11.7%) in low income households. The study also estimated an increase in consumption of alternatives to smoking, particularly Nicotine patches, of 2.1% (AYA, 2017)

Question

How would I Draw a demand and supply diagram for the market for Cigarettes in Mexico based on the information above? How would I name and fully label the diagram including both axes, and indicate and explain points of interest using P for price (P1, P2 etc) and Q for quantity (Q1, Q2 etc). Draw the demand curve assuming the elasticity for the whole Mexican economy holds. (Don’t use actual numbers, it can’t be exact with the information given – just decide roughly how steep or flat to draw it, and give a reason for your choice).

Then After you've drawn the diagram for the above draw another diagram showing (before a tax is imposed on cigarettes)

Answer 1

Price elasticity of demand of cigarettes can be calculated by dividing percentage change in quantity demanded with the percentage change in price.

Price elasticity of demand of cigarettes = 7.6/10 = 0.76.

Since Price elasticity of demand of cigarettes, the demand is elastic in nature. The demand curve would be flatter.

When a tax is imposed, demand curve shifts to the left due to which price at which cigarettes are sold increases to P2 and the quantity demanded of cigarettes falls to Q2

edit : figure 2