ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Question 2  Price elasticity of demand and the illegal market for meth in Wyoming

  1. Draw the (illegal) market for meth in Wyoming. Since meth is highly addictive the demand is very inelastic. Supply is more elastic than demand. Label the equilibrium price and quantity, P* and Q*, respectively. 













  2. Now imagine that the Wyoming police manages to discover, raid and shut down a big meth producing lab. Add a new curve to your market diagram to show what happens as a result of this successful police work. Also comment on what is bigger: the change in price or the change in quantity ; and why that is the case 







  3. We saw in our lectures that legalizing cocaine would likely drop the street price of cocaine by an estimated 95%. Assuming the street price of meth would drop equally if legalized, what percentage change in quantity demanded of meth would we expect if the price elasticity of demand of meth is - 0.1?  
Expert Solution
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Step 1: Define price elasticity

Price elasticity is a way to gauge how responsive the demand for a product or service is to alterations in its price. It's computed by dividing the percentage change in quantity demanded by the percentage change in price.



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