Problem_Set_3_-_Answers

Problem_Set_3_-_Answers - Department of City & Regional...

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Department of City & Regional Planning CP 1134A - Fall 2006 U niversity of California at Berkeley Mark Wolfe PROBLEM SET #3 ANSWERS Total Points: 40 1. Consider Humboldt County, California where a substantial share of the arable land is used to grow marijuana. The production of marijuana is illegal, and there are harsh penalties imposed on marijuana growers who are caught. Marijuana growing is a lucrative and extremely competitive industry. Assume that economic profits therefore equal zero (total revenue = total costs). Included in the costs are the various costs associated with engaging in legal activities, such as high concealment costs, legal costs, opportunity cost of time spent under arrest or in jail, and very high transportation and labor costs. Suppose that the California electorate passes a ballot measure legalizing marijuana production and consumption. a. Draw a graph showing the effects of the legalization on the equilibrium price and quantity of marijuana. Explain your graph. The cost of marijuana production decreases. This shifts the supply curve out to the right. The equilibrium price decreases and the quantity consumed increases. If you assume that legalization causes consumers to demand more at any given price, then the demand curve may shift out as well. In that case, the equilibrium quantity consumed will increase even more, but the equilibrium price will either increase or decrease depending on whether legalization shifts the demand curve out more or less than it shifts the supply curve…. 5 points
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Problem_Set_3_-_Answers - Department of City & Regional...

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