Question

1. In class we used the example of the illegal drug market to illustrate the implications of elasticity. According to theory, the optimal policy to reduce drug-related crime is to find a way to decrease demand in the market. This theory is primarily based on what two facts about this market?

a. The supply of illegal drugs is inelastic and the amount of crime decreases as the price of drugs increases

b. The supply of illegal drugs is elastic and the amount of crime decreases as the price of drugs increases

c. The demand for illegal drugs is elastic and the amount of crime increases as the price of drugs increases

d. The demand for illegal drugs is inelastic and the amount of crime increases as the price of drugs increases

e. Illegal drugs taste good and do not cause any problems for society.

2. If the demand for a certain good is highly inelastic, and supply of the good is relatively elastic, then the burden of a tax on this good will fall almost entirely on the buyers in the market.

a. True

b. False

Answer 1

1. d. The demand for illegal drugs is inelastic and the amount of crime increases as the price of drugs increases.
(Demand for illegal drugs is inelastic because their consumers consume them irrespective of the price so as price increase, their sale also increase which means amount of crime increases as the price of drugs increases)

2. a. True
(Buyers burden is inversely proportional to elasticity of demand. Lesser the elasticity of demand, more is the burden on buyers. So, if the demand is highly inelastic then burden of tax will fall almost entirely on the buyers in the market)