Question 1 (20 points)

Consider the market for cannabis in Quebec province, where the equilibrium price of cannabis is $8 per gram and the equilibrium quantity is 160 grams per period. Empirical studies report that the demand and supply equations are linear, the price elasticity of market demand is -0.1 and the price elasticity of supply is +0.4.

(Hint: the price elasticity of supply is , where Qs is the quantity supplied) ssssQPdPdQPQ==%%

1.1) (10 points) Derive the direct demand and direct supply equations of cannabis by using the information above.

• The direct demand equation is _____________________
• The direct supply equation is ______________________

1.2) (10 points) To increase revenue of Quebec Government from selling cannabis, the Socit Qubcoise du Cannabis (SQC) increases the price of cannabis to $10 per gram.

Calculate the consumer surplus before and after the increase in price. Draw a demand curve and show consumer surplus areas before and after the increase in price.

• Consumer surplus before the increase in price: $ ______________
• Consumer surplus after the increase in price: $ _______________