Microeconomic Applications | Questions-Answers

Running head: Microeconomic Applications
Microeconomic Applications
Name of the Student
Name of the University
Student ID

Microeconomic Applications1
Table of Contents
Answer 1: The legal Australian Cigarette Market...........................................................................2
Answer 2: The market structure of the legal Australian cigarette market.......................................5
Answer 3: The illegal Australian cigarette market..........................................................................7
Reference.......................................................................................................................................11

309
D
31
Price per pack of Cigarettes ($)
S
Packet of Cigarettes (in millions)
Microeconomic Applications2
Answer 1: The legal Australian Cigarette Market
(a)
Figure 1: Cigarette market equilibrium in Australia in 2017

Q1
P1
D1
Q
D
P
Price per pack of Cigarettes
S
Packet of Cigarettes
Microeconomic Applications3
Source: (Created by the Author)
In figure 1, it can be seen that the market equilibrium of the cigarette market in Australia
occurs where demand meets supply and at that point equilibrium quantity and price is given by
309 million packets and $31 per packet.
(b) Cigarette is a demerit good and thus consumers do not give up much of consumption
compared to the rise in price. Therefore, in case of cigarette price elasticity is significantly less
than 1 (Tucker, Laugesen and Grace 2017). Hence, for cigarette demand is assumed inelastic. On
the other hand, as the demand is inelastic rise in price increases the profitability of the cigarette
manufacturers’ rise. Thus, supply increases as price increases and hence the supply of the
cigarette assumed elastic.
(c)
Figure 2: Effect of education programme on cigarette market