CMA Foundation · Fundamentals of Business Economics and Management · Theory of Demand and Supply
The government announces a higher excise duty on cigarettes, and the market price of cigarettes rises from ₹15 to ₹18 per stick. Assuming nothing else changes, which of the following describes the effect on the demand for cigarettes?
The rise in the cigarette price causes a movement up along the same demand curve, which is a contraction in quantity demanded. The curve itself does not shift, because the cause is the good's own price and not income, tastes, or the prices of related goods.
- AA leftward shift of the demand curve
- BA rightward shift of the demand curve
- CA movement upward along the same demand curve, giving a contraction in quantity demandedCorrect
- DAn increase in demand caused by a change in taste
Explanation
The price of the good itself has risen, so the consumer moves up along the same demand curve to a smaller quantity. This is a contraction in quantity demanded. The demand curve does not shift, because no non-price determinant such as income, tastes or related prices has changed. The shift options wrongly treat a own-price change as a change in demand.
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