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4. [25 Points] There is a thriving and perfectly competitive illegal marijuana market in Berkeley (ignore medical marijuana for this question). The demand for marijuana
4. [25 Points] There is a thriving and perfectly competitive illegal marijuana market in Berkeley (ignore medical marijuana for this question). The demand for marijuana in Berkeley is given by QD = 12 2P and the supply is given by Q5 = 6 + 4P. a) b) C) d) What is the equilibrium price and quantity in the black market? (4) In a raid, the government destroys half the quantity supplied of marijuana. What happens to equilibrium price and quantity in the short run? And in the long run? (4) Now go back to the original scenario. Suppose the government raises potential jail terms for the (perfectly identical) dealers such that only half of them are willing to remain in business. What happens? (4) Suppose the government legalizes marijuana but imposes a 100% sales taX T on the buyers, i.e., T = P. Now what are the demand and supply functions? What is the equilibrium quantity, what is the equilibrium price paid by the buyers (including tax) and what is the equilibrium price received by the suppliers? (7) What is the consumer surplus in scenarios a), b), c)? (6)
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