We will continue with chapter 4. Read the following summary of a research paper

Question

We will continue with chapter 4. Read the following summary of a research paper and answer the questions that follow This paper estimates the price responsiveness of cannabis, alcohol and cigarette use. Individual level data from four waves of the National Drug Strategy Household Survey are merged with previously unavailable state level data on cannabis prices, and ABS alcohol and tobacco price indices. In addition to own price effects, we estimate cross price effects and the impact of differing legal regimes for cannabis on the use of these three drugs. Establishing the nature of the interdependencies between cannabis, alcohol and cigarettes is important in the development of drug policy so that a policy directed at one drug does not unintentionally affect the demand for other drugs. We find that participation in the use of all three drugs is responsive to own prices and that decriminalisation of cannabis leads to higher cannabis use. Cannabis is found to be a substitute for alcohol and a complement to tobacco. Alcohol and tobacco are found to be complements." (http://citeseerxist.psu.edu/viewdoc/download?doi-10. 1.1.41.7131&rep;=rep1&type-pdf; ) Answer if the following statements are true or false. Be able to provide an explanation of your answer. 1. An change in the price of cannabis causes a change in the demand for cannabis. 2. An increase in the price of cannabis causes an increase in the demand for alcohol. 3. An increase in the price of cannabis causes an increase in the demand for tobacco. 4.An increase in the price of alcohol causes an increase in the demand for tobacco.

Explanation / Answer

(1) False

A change in a good's own price changes its quantity demanded, but its demand does not change. A good's demand is determined by non-price factors.

(2) True

Since cannabis and alcohol are substitutes, an increase in price of cannabis will decrease its quantity demanded, and increase the demand for alcohol.

(3) False

Since cannabis and tobacco are complements, an increase in price of cannabis will decrease its quantity demanded, and decrease the demand for tobacco.

(4) False

Since alcohol and tobacco are complements, an increase in price of alcohol will decrease its quantity demanded, and decrease the demand for tobacco.

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