Question

1. Suppose in the country of Dopeland, the typical drug user’s demand for grams of heroin is given by qd = 5, and the typical dealer’s supply is given by qs = 1 + .20P, where P is the price of a gram of heroin.

1a. Suppose drugs are illegal in Dopeland, and there is one dealer and 100 users. How many grams of heroin will be produced and sold in Dopeland? What will a gram of heroin sell for?

1b. Suppose drugs are made legal in Dopeland, and the illegal dealer is replaced by 20 “DopeMarts” started by entrepreneurs. How many grams of heroin will be produced and sold in Dopeland? What will a gram of heroin sell for?

2. Discuss how this admittedly simple analytical exercise might or might not be useful for evaluating the effects of drug legalization in the actual world we live in. What assumptions are implicit in this exercise that would have to hold in the real world in order for the same effects to be realized?

3. Suppose as a result of an increase in the price of prescription opioids (e.g. oxycontin), the amount of heroin demanded by a typical user at any price “doubles.” Redo #1 under this scenario. How would you describe the relationship between heroin and opioids? Why?

Answer 1