Question

• Read the following statement and discuss if you agree or disagree, and your rationale: If the demand of illegal drugs is inelastic, increased arrests of illegal-drug sellers will increase total expenditures on illegal drugs.
• Discuss at least 2 reasons for the change in this scenario: Early suppliers of more fuel-efficient cars were able to charge premium prices for them, but that ability faded as other suppliers adopted similar technologies.

Answer 1

1)

Demand for illegal drugs is inelastic. it suggests that change in price would affect demand only marginally. Thus, by charging higher price, expenditure can be raised or in other words, if price is increased, demand will fall only marginally relative to change in price. Arrest of drug sellers would result into higher price of drug as now it would be risky act to sell drugs. Thus, Now expenditure on drug would rise.

2)

1)

First, Suppliers of fuel efficient cars were offering differentiated products with different quality. Hence, they were able to charge higher price.

2)

Competition has increased after same technology is made available to all suppliers. Now each would try to woo customers with reduced prices and more offers.