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question in elasticity of demand

A) In response to increasing thefts by drug addicts, the government passes legislation increasing both the penalty and probability of punishment for suppliers of illegal drugs. What would be a good prediction of what would happen to the rate of property crime committed by drug addicts if the price elasticity of demand for illegal drugs is -0.01? Please explain?

B) Suppose that a firm was accused of illegally conspiring with other sellers to act as a monopolist. In searching for an expert witness, they discover one economist who has calculated the cross elasticity of demand for the industry's product to be +2.05, while another economist has calculated the cross elasticity of demand to be +0.43. Which economist would be best to hire to testify on behalf of the firm? Please explain?

C) Im having trouble differentiating between economic efficiency and technical efficiency. Can you explain the difference to me? And how do the relation of these terms affect this statement:
"Cooking wiith gas makes sense as it is more efficient: it uses one-third less energy than cooking with electricity"
Please comment on this statement.

Solution Preview

A) The governmemt passes a legislation increasing both the penalty and probability of punishment for suppliers of illegal drugs. Now, if the law comes into force, the suppliers of drugs are likely to get arrested and some might leave the business. The net effect is that the prices of the illegal drugs are likely to shoot up.
However, if the price elasticity of demand is -0.01, for illegal drugs, this means that the price elasticity is very low. That is the increase in price has a very negligible effect on the quantity demanded. This would mean that the total p x q, the total money spent on illegal drugs would go up. This would mean that the need for funds with the drug addicts would increase dramatically. If the drug addicts were financing their drug purchases by committing property crime, then there would be a drastic increase in the number of property crimes including theft.
So the effect of the legislation would be exactly the opposite of what is envisaged.

B) The first economist who had predicted a cross elasticity of demand for the industry's product to be +0.43 would be the best one to hire to testify in the case, because he has shown that there is weak responsiveness in the quantity ...

Solution Summary

A question in elasticity of demand is explored.

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