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Unformatted text preview: PADP 6950 Fertig Fall 2011 UGA Homework 2 Due September 7, 2011 1. Assume that if drugs (like marijuana, cocaine and heroin) were legalized, the supply curve would shift down and to the right because the business of drugs would become less risky and less expensive. a. Would you expect the demand curve to shift if drugs were legalized? Why or why not? b. What would happen to the drug price and quantity consumed if legalized? Use a graph to illustrate your answer. c. Regardless of your answers above, assume that the demand curve does not shift (for simplicity). Although it is difficult to empirically test, many people believe that the demand for drugs is price inelastic for addicted users and price elastic for young or occasional, recreational users. Show graphically what would happen to the total revenue of drug sellers whose customers are addicted and of sellers whose customers are casual users (assuming that drug sellers could be separated by their customer type). 2. Do you think that the price elasticity of demand for a good is lower if the good costs a larger portion of one's income? Give examples of goods to illustrate your point. 3. Assume that the demand for whiskey is Qd=10-P and the supply of whiskey is Qs=P. a. Calculate the equilibrium price and quantity and show them on a supply and demand diagram. b. Suppose the government wants to discourage whiskey consumption and so levies a $2 tax for each unit of whiskey sold. Draw this on the diagram and calculate the new equilibrium price and quantity. ...
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This note was uploaded on 01/18/2012 for the course PADP 6950 taught by Professor Fergi during the Spring '11 term at UGA.
- Spring '11