‘; Using demand and supply curves, show the effect of each of the following on the market
for cigarettes.
a. A curve for lung cancer is found.
b. The price of cigars increases.
c. Wages increase substantially in states that grow tobacco.
d. A fertilizer that increases the yield per acre of tobacco is discovered.
e. There is a sharp increase in the price of matches, lighters, and lighter fluid.
f. More states pass laws restricting smoking in restaurants and public places.
3. The Cash for Clunkers program run by the federal government last year gave consumers approximately a $4,000

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rebate on the purchase of a new fuel efficient car if they simultaneously turned in a used car which received less
than 18 miles per gallon. A recent article in the U.S.A. Today (August 10, 2009) notes, “the clunker program
could cause prices [of used cars] to rise 5% to 10% … says Alec Gutierrez, senior market analyst for Kelley Blue
Book. ‘It’s going to drive prices up of some of the most affordable vehicles we have on the road.'” The article
notes that the price rise is not only due to the government program but also to weak economic conditions
(consumers’ real incomes are down).
a. Illustrate how (i) the government program and (ii) lower consumer income affect the market for used cars
using a supply and demand diagram. What can you say about the price of used cars? What about the
quantity bought and sold?
b. What if this program took place in a strong economy (consumers’ real incomes were higher) instead of a
weak one. Now what could you say about the price of used cars and the quantity bought and sold?