Question : The demand curve for soda is represented by the following equation:Q =12-2P

A. If at the current market price, the elasticity of demand for soda is -2, what is the market price and what is the equilibrium quantity?

B. Please write down a supply curve that aligns with the above characterized equilibrium.

Leaving the general market behind, let's focus now on an individual soda consumer. Our individual is attempting to maximize their beverage consumption. They are interested in the consumption of soda and water and have the following utility function: U (S, W) =S * W, where S is for soda and W for water. Their total income of 12 and prices for one unit of soda and water are both 2.

C. Draw the budget constraint and write it down as an equation.

D. In which quantities will our individual consume soda and water?

E. Briefly describe the intuition behind the calculations in D.

Question: The sale of cannabis products is illegal in many places of the world, while it is completely legal in other places. Briefly explain the following two scenarios with help of our model on consumer and producer surplus. Supplement your answers whenever appropriate with drawings and illustrations.

1. It is well-known that there is a market for cannabis products even when selling them is illegal. How would you explain this phenomenon? (Hint: Think about analogies to the price ceiling for rental units.)

2. After a complete ban on the sale of cannabis products, one jurisdiction starts to allow their sale. Initially, they do not tax those sales at all. You observe a decrease in the market price of cannabis. Explain this phenomenon.