2 Short Answers 85 Problems Please be sure to Show all your work for each calculation. 1. On January 1st, 2014, the state of Colorado was the rst to legalize the recreational sale and use of marijuana. Products containing cannabis could only be sold by licensed retailers. Purchase and use were limited to those age 21 and older (there are also limits on how much someone could sell or possess at once). At the time, there was a huge amount of uncertainty about what would happen as a result of le- galization. Today, we can use Colorado's experience to understand some key issues about supply and demand, which can help inform today's debates about the regulatory issues surrounding marijuana. A few facts about the Colorado market prior to legalization that will be useful: Estimates suggest that around 390,000 people used marijuana each month prior to 2014, which is fairly consistent with surveys that suggest 914 percent of teens and adults use marijuana. Surveys also suggest that an average user consumes about 8.5 grams per month (although like other drugs, there is a very positively skewed distribution). Prior to legalization, Colorado users reported paying a pre-tax average of $8 per gram. And data from the present day suggests that just after legalization, demand increased by about 50 percent. (a) Draw a supply and demand graph that represents the marijuana market prior to the law change, labeling what you can given what you know about the market. If there are externalities in the market, represent them on the graph and explain what they are. Quantity the size of the market (amount of revenue). (10 points) b Immediatel after le alization, Colorado on] anted sales licenses to existin medical mari'uana 3' g Y gr g .1 providers. This meant that in the short term, marijuana supply was basically xed. A few months into 2014, the price of a gram increased by about 40 percent, and sales went up by 564,000 grams per month. Draw this short-term change in the market, and calculate the elasticity of supply. For now, ignore any marijuana taxes. (10 points)