E130PS1A - consumed would fall. If legalizing cocaine...

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P r o f e s s o r V a l e r i e R a m e y 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, P s = 21, P d =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 (P D ) will be less. (iii) the price paid by other consumers will go up. (iv) the price received by drug companies (P S ) 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. Price would rise and quantity
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Unformatted text preview: consumed would fall. If legalizing cocaine shifted the demand curve out, then price would still rise but quantity consumed would not fall as much. This policy would be much better for the government budget because it would generate revenue rather than requiring expenditures. 4. high if inelastic. 5. (1) P rises (2) The quantity of guns produced rises (3) The quantity of guns bought by private individuals falls. 6. A. Q = 400 20 P for P 20 Q = 0 for P>20. B. Q = 200. 7. A. 40 For 3,4 For 1,2 MB 10 10 20 Q B. The market demand curve is: Q = 40 P for 10 < P 40 = 60 3P for 0 P < 10 The inverse demand is: P = 40 Q for 0 Q 30 = 20 1/3 Q for 30 Q 60 = 0 for Q > 60 P, MB 10 30 60 Q B. Q = 25 C. Q = 45 8. A. Industry supply: Q = 3 P Inverse supply: P = 1/3 Q. B. At P = $24, the first 6 firms will produce 8 units each and the last 4 firms will produce 6 units each, for a total of 72 units....
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E130PS1A - consumed would fall. If legalizing cocaine...

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