Use a demand and supply graph of the youth smoking market to show the effects of the tax cut in eastern Canada. Assume that the initial price is $6.00, the initial quantity is 100 units, and each youth smoker smokes five cigarettes per day. (Related to Application 1)

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Application 1 THE LAW OF DEMAND FOR YOUNG SMOKERS APPLYING THE CONCEPTS #1: What is the law of demand? As price decreases and we move downward along the market demand for cigarettes, the quantity of cigarettes demanded increases for two reasons. First, people who smoked cigarettes at the original price respond to the lower price by smoking more. Second, some people start smoking. In the United States, cigarette taxes vary across states, and studies of cigarette consumption patterns show that higher taxes mean less cigarette consumption by youths. Using data from the Youth Risk Behavior Surveys (YSBS), one study shows that increases in state cigarette taxes between 1990 and 2005 resulted in less participation (fewer smokers) and lower fre- quency (fewer cigarettes per smoker). A change in cigarette taxes in Canada illustrates the sec- ond effect, the new-smoker effect. In 1994, several provinces in eastern Canada cut their cigarette taxes in response to the smuggling of cigarettes from the United States (where taxes are lower), and the price of cigarettes in the provinces decreased by roughly 50 percent. Researchers tracked the choices of 591 youths from the Waterloo Smoking Prevention Program and concluded that the lower price increased the smoking rate by roughly 17 percent. Related to Exercises 1.6 and 1.8. SOURCES: (1) Anindya Sen and Tony Wirjanto, "Estimating the Impacts of Cigarette Taxes on Youth Smoking Participation, Initiation, and Persistence: Empirical Evi- dence from Canada," Health Economics 19 (2010), pp. 1264-1280. (2) Christopher Carpentera and Philip J. Cook, "Cigarette Taxes and Youth Smoking: New Evi- dence from National, State, and Local Youth Risk Behavior Surveys, Journal of Health Economics 27 (2008), pp. 287-299.