Question

2. “Pot producers heading down bankruptcy path: Insiders predict price slump, oversupply will spell doom for numerous companies” (Subramainiam, V., Vancouver Sun Newspaper, Thursday, January 02, 2020, p. C7). “Cannabis industry insiders are bracing for a slew of bankruptcies in the coming year as small and medium-sized companies low on cash struggle to raise funds in the downtrodden sector. ‘We have had a busy few years, but next year we’re going to be busy for a different reason – we expect a few million dollars in legal fees from insolvencies and consolidations,’ said Ranjee Dhillon, a partner at McCarthy Tetrault LLP and the firm’s cannabis group lead. i. In assignment 1, we found the Inverse Demand Curve to be: P = 14.6 – 0.40 [Qd]. Suppose that we also know that the Inverse Supply curve to be: P = 2.5 + 0.9444 [Qs] Given that at the equilibrium position, Qd = Qs, find the Market Equilibrium Quantity Exchanged, Qe and the Market Equilibrium Price, Pe. 3. Suppose that the Association for Fair Prices for Pot Producers, the FPPP, convince the government that the Pot Price should be set at a “FLOOR” of $12.50. i. At this Price Floor, determine each of the Quantity demanded, Qd and the Quantity supplied, Qs from the information provided in question 2 above. ii. Briefly explain whether or not this Price Floor is (1) Effective or Not Effective, and (2) Why or Why not? iii. Briefly explain the resulting Market condition as a result of this Price Floor in relation to the previous Market Equilibrium position determined in question 2 above. (1 Mark).

Answer 1

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Solution 2,