The following shows the demand function for marijuana: Q = 2,000 – 4P + 2PC - 0.2I where Q = units of marijuana P = Price of marijuana PC = Price of cigarette I = Income level Marijuana is selling at a price of $100.
The price of cigarette is $50. Income level is $5,000. a. Find the price elasticity of demand for marijuana at the market equilibrium. b. Recently, the police cracks down a major marijuana supplier. A commentator suggests this will increase the crime rate.
Support this view based on the answer in (a).
c. Find the cross price elasticity between marijuana and cigarette. Interpret the result. d. Suppose the government increases the tax on cigarette such that its price soars by 20%.
Calculate the impact on the sales volume of marijuana.
e. How will the sales volume of marijuana change during economic recession? Explain.