In the absence of government interference, there is a constant marginal cost of
ID: 1113769 • Letter: I
Question
In the absence of government interference, there is a constant marginal cost of $6 per ounce for growing marijuana and delivering it to buyers. Suppose that government authorities seize shipments whenever they find them and resell the marijuana that they seize on the open market. The probability that any shipment of marijuana is seized is .10. If a shipment is seized, there is no other punishment besides loss of the marijuana that is seized. The effect of the government action is to
answer: raise the equilibrium price by $.67.
HOW TO SOLVE?
Explanation / Answer
Answer :- Raise the equilibrium price by $ 0.67.
Explanation :- Increase in equilibrium price = 6 * 0.10 / (1 - 0.10)
= 6 * 0.10 / 0.90
= 6 * 0.1111
= 0.6666 (Rounded off to 0.67)
Conclusion :- Equilibrium price is to be raised / increased by $ 0.67 in the given question.
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