Problem 1
Some policy makers have argued that the U.S. government should purchase illegal drugs, such as cocaine, to increase the price that drug users face. Explain how the elasticity of demand for illegal drugs relates to the efficacy of the policy. Would you be more or less likely to favor this policy if told that the demand for illegal drugs was inelastic?
Problem 2
Suppose that the demand for down pillows is given by QD = 120 2P and that the supply of down pillows is given by QS = -30 + 3P
a) Derive and graph the inverse supply and inverse demand curve for down pillows
b) Solve for the equilibrium price and quantity in the market for down pillows
c) Derive the own-price elasticity of demand at the equilibrium point. Recall that one can rewrite the expression for the own-price elasticity as where, is the slope of the demand function with respect to P.
Problem 3
In March 2002, the retail price of gasoline was $1.19 per gallon exactly the same as it was in August 1990. Yet, total gasoline production and consumption rose from 6.6 million barrels per week in 1990 to 8.7 million barrels per week in 2002. Graphically depict the market for gasoline in August 1990 and then show the shifts in the supply and demand for gasoline required to explain the equilibrium price and quantity realized in March 2002.
Problem 4
Suppose that the demand for Diet Coke is given by QD = 105 5P and the supply for Diet Coke is given by QS = 10P.
a) Derive and graph the inverse supply and inverse demand curves
b) Solve for the equilibrium price and quantity sold in the market for Diet Coke
c) Suppose that the supply of Diet Coke were to shift such that at each price, 30 fewer units are offered for sale. Derive and graph the new inverse supply curve for Diet Coke.
d) Solve for the new equilibrium price and quantity in the market
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.