in the absence of government interference, there is a constant marginal cost of $5 per ounce for growing marijuana and delivering it to buyers.If the probability that any shipment of marijuana seized is .20 and the fine if a shipper caught is $45 per ounce, then the equilibrium price of marijuana per ounce is

A) $50.
B) $17.50.
C) $4.
D) $14.
E) $6.

Question

Kevin Pelley · Accepted Answer

Final Answer : B, Explanation :  In order to determine the equilibrium price, we need to consider the supply and demand for marijuana in the market. Since there is no government interference, the marginal cost of producing and delivering marijuana is constant at $5 per ounce.Now, let's consider the demand for marijuana. Since there is no information given about the demand for marijuana, we can assume that it follows a standard downward-sloping demand curve. In other words, as the price of marijuana increases, the quantity demanded decreases.Next, we need to consider the effect of the probability of seizure and the fine on the supply of marijuana. The probability of seizure is 0.20, which means that there is a 20% chance that any shipment of marijuana will be caught by authorities. If a shipment is caught, the fine is $45 per ounce. This means that the effective marginal cost of producing and delivering marijuana is not just $5, but $50 ($5 + $45).As a result, the supply curve for marijuana is upward-sloping, because as the price of marijuana increases, the probability of seizure and the associated fine become more important considerations for suppliers. This means that at higher prices, the quantity supplied is lower than at lower prices.Based on these factors, we can determine that the equilibrium price of marijuana will be where the quantity supplied and quantity demanded are equal. At this price, there is no excess supply or demand in the market.Assuming that the demand curve is a standard downward slope, the equilibrium price will be where the demand curve intersects the effective supply curve (taking into account the probability of seizure and the associated fine). This intersection point can be calculated using algebraic methods or graphical methods.Using algebraic methods, we can set the effective supply curve equal to the demand curve and solve for the price:$50 - $45(0.20) = PP = $17.50Therefore, the equilibrium price of marijuana per ounce is $17.50.

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