Tuesday, November 30th, 2010

Answer to problem about illegal drugs:

1. Supply curve shifts because the US government is devoting billions of dollars each year to reduce the flow of drugs into the country.

2. Supply curve shifts to the left to reduce the amount of illegal drugs produced.

3. Price increases, quantity decreases.

4. Demand for illegal drugs is inelastic because drug users are addicted and therefore see the drugs as necessities.  Supply is also inelastic because it takes a considerable amount of time to produce more, so sellers cannot respond to a price change quickly.  Given this information, the graph should illustrate two mostly vertical lines.  When the supply shifts to the left, price increases dramatically, but quantity only falls slightly.  The large price increase, coupled with the addicted users, leads to an increase in drug-related crime as addicts resort to crime to pay for their habit.  Total revenue for sellers continues to increase, even with the reduction in supply, because of the inelastic demand for the product.

5. Drug-related crime increases because price has gone up so much, and addicts still need the drugs.

6. Rather than the supply curve shifting left, the demand curve would shift to the left instead as policymakers reduce the demand through drug education.  As a result, price would decrease, and quantity would decrease.  With a price decrease, sellers of illegal drugs would not make as much money and would lose total revenue.  This change might create an incentive to leave the drug market altogether.  There would also be a reduction in drug-related crime as a result of a price decrease.