Professor Valerie Ramey Econ 130, Fall 2007 Abbreviated Answers to Problem Set #1 For purposes of answers checking only. If you cannot get the same answer, go to office hours 1.A. P = 23, Q = 10 B. CS = 50; PS = 100, SS = 150. C. Q = 9, Ps= 21, Pd=24, CS = 81/2, PS = 81 Govt revenue = 27, Deadweight loss =3/2. 2.(i) The equilibrium quantity of drugs purchased will increase. (ii) the after-subsidy price paid by seniors (PD) will be less. (iii) the price paid by other consumers will go up. (iv) the price received by drug companies (PS) will be greater. 3. A. Drug interdiction efforts increase the marginal cost of providing drugs (e.g. shift the supply curve up). This raises the price, and as long as demand is not too inelastic, also reduces quantity consumed. This policy has a negative effect on the government budget since it requires high expenditures. B.If making cocaine legal did not shift the demand curve, the effect on price and quantity would be similar to the previous case.
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