Question

The American Cancer Society announces the results of a study of 10,000 smokers and nonsmokers. A 21 -year-old smoker who continues smoking two packs a day has a lifetime expectancy that is 20 years shorter than a 21-year-old nonsmoker. As a result of this announcement, the cigarette equilibrium __________. \- \((\mathrm{LO} 3)\) a) price will rise and quantity sold will rise b) price will rise and quantity sold will fall c) price will fall and quantity sold will fall d) price will fall and quantity sold will rise

Short answer

The correct answer is c) price will fall and quantity sold will fall, as the demand for cigarettes decreases due to the negative announcement about smoking and its consequences.

Step-by-step solution

Understanding the context of the announcement

The announcement states that a 21-year-old smoker who continues smoking two packs a day will have a 20-year shorter life expectancy than a 21-year-old nonsmoker. This negative information about smoking is likely to discourage people from consuming cigarettes and may decrease the demand for cigarettes.

Effects on cigarette equilibrium

When the demand for a product decreases, the equilibrium price and quantity sold of that product will decrease as well. Essentially, fewer people will be willing to smoke and pay higher prices for cigarettes, causing suppliers to either lower their prices or sell fewer cigarettes.

Choosing the correct option

Based on the analysis above, we can now evaluate the given options: a) Price will rise and quantity sold will rise - This option contradicts the expected decrease in demand for cigarettes and therefore is incorrect. b) Price will rise and quantity sold will fall - This option also contradicts the expected decrease in demand for cigarettes, as the price should decrease along with the demand. c) Price will fall and quantity sold will fall - This option aligns with the idea that the demand for cigarettes will decrease, causing both price and quantity sold to fall. Therefore, this is the correct option. d) Price will fall and quantity sold will rise - This option contradicts the expected decrease in demand for cigarettes, as the quantity sold should decrease along with demand. Thus, the correct answer is c) price will fall and quantity sold will fall.

Key concepts

Supply and Demand

Supply and demand are foundational concepts in microeconomics that describe the relationship between the availability of a good or service (supply) and the desires of those with purchasing power (demand). When we consider the exercise involving smokers and the significant risks tied to smoking reported by the American Cancer Society, we can see how these concepts come into play.

A decrease in the life expectancy for smokers could lead to a decrease in demand for cigarettes, as more consumers might abstain from smoking or reduce their cigarette consumption. In the world of supply and demand, if demand decreases while supply remains constant, we should expect to see a fall in the equilibrium price and the quantity of cigarettes sold.

• A decrease in demand typically leads to a downward pressure on price.
• Suppliers may produce less as demand and profitability decrease.
• The responsiveness of demand to changes in price or other factors is known as 'demand elasticity'.

Market Equilibrium

Market equilibrium occurs when the quantity supplied of a good matches the quantity demanded at a specific price point. This equilibrium is depicted graphically where the supply and demand curves intersect. In regards to the case study at hand, understanding market equilibrium helps us interpret the likely outcome of the negative health announcement on the market for cigarettes.

With reduced demand, the new equilibrium point is expected to be at a lower price and a lower quantity, reassuming the market is left to adjust without external influences. In a state of equilibrium:

• Sellers are selling all that they want to at the current price.
• Buyers are buying all that they desire at the current price.
• Any change in supply or demand will disrupt the equilibrium, leading to a new balance between price and quantity.

Thus, the equilibrium will shift leftward on the graph, indicating a lower quantity and price.

Consumer Behavior

Consumer behavior examines how individual preferences and economic decisions affect the demand for goods and services. In microeconomic theory, consumer behavior is influenced by a variety of factors, including information, which plays a pivotal role as seen in the cigarette example.

The announcement from the American Cancer Society provides new information that smoking considerably shortens life expectancy. This tends to alter consumer preferences, likely leading to a shift in consumer behavior away from purchasing cigarettes—demonstrating how powerful information can be in shaping consumer choices. Because consumer behavior is influenced by such revelations, we can predict a significant impact on the market for cigarettes, as highlighted by the subsequent reduction in quantity and price.

• Health information affects consumer preferences and perceived value of a product.
• Consumers' decisions to buy less or stop buying a product altogether lead to a fall in demand.
• Consumer choices dictate market trends and can lead to widespread shifts in demand for certain goods.

It is important to note how external information can reshape market dynamics by deeply affecting consumer behavior.