hw2soln - PADP 6950 FallZOll Fertig UGA Homework 2...

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Unformatted text preview: PADP 6950 FallZOll Fertig UGA Homework 2 Solutions 1. Assume that ifdrugs [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 ifdrugs were legalized? Why or why not? Yes, the demand curve will likely shift out because some people will find it more palatable to use drugs ifthey are legal, but would not have used them when they are illegal. b. What would happen to the drug price and quantity consumed if legalized? Use a graph to illustrate your answer. The price change will depend on the relative shifts ofthe supply and demand curves; ifdemand shifts out more than supply, the price will go up;ifsupp1y shifts out more than demand, the price will go down. However, in either situation, the quantity consumed will go up. c. Regardless ofyour answers above, assume that the demand curve does not sh ift fior simplicity]. Although it is difiicult to empirically test, many people believe that the demandfor drugs is price inelasticfor 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 ofsellers who customers are casual users [ assuming that drug sellers could be separated by their customer type)- M?ij islet m 2. Do you think that the price elasticity ofdemandfor agood is lower ifth costs a larger portion ofone’s income? Give examples of goods to illustrate your point. No. The price elasticity ofdemand will be higher for commodities that occupy a large fraction ofconsumer income. The demand for shoeiaces does not change much ifthe price ofshoelaces rises, but families wiil buy fewer cars ifcar prices rise. 3. Assume that the demand for whiskey is Qd=10-P and the supply of whiskey is am). a. Calculate the equilibrium price and quantity and show them on a supply and demand diagram. Q‘EIO-P = P = QS :P 1022? P=5 n. , deqszs ’ 0 Equations for graphing V D: Q=10~P -9 P=10—Q S: Q: 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. One solution: T) PcZEPs ‘ Qd=10-pc=Ps=QS - .. lo'PCZPc'Z t Pc=6 (g 135:4 P _ Q“=QS=4 Cc”) Q 6%,) 4 Another way: We know that demand curve shifted down by $2. $0, new demand Kine: P=8—Q Set it equai to supply equation Q5=8-Qd 2Q28 ...
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hw2soln - PADP 6950 FallZOll Fertig UGA Homework 2...

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