demand and supply

1. Using the concepts of demand and supply, explain why cannabis prices declined sharply by 70% in Colorado between 2014 and 2018. Use a diagram of the cannabis market to illustrate your point.

2. With the help of a numerical example, explain why California and Maine tax cannabis by weight rather than by price.

3. Using the concept of substitutes and complements, explain with the help of a diagram how legalising cannabis may possibly affect the sales of alcohol and cigarettes. When the State government evaluates the effect of legalising cannabis on tax revenue, should it look only at the sales of cannabis? Or, should it also consider the changes in the sales of alcohol and cigarettes?

Expert Solution

Step 1

The market is a place where the producers and the consumers would interact with each other and engage in transactions which result in buying of a good. The market is a place where the supply and the demand would interact with one another and determine the equilibrium price and the equilibrium quantity.

The surplus in the market arises when the supply exceeds demand and the shortage arises demand exceeds supply. Thus, equilibrium in the market is static and stable which results in the producers and consumers no incentive to deviate from the market equilibrium.

Step 2

The market for the cannabis in the region C would result in the ever high growing supply in the quantity of cannabis which resulted in the fall in the price of the cannabis. The large increase in the supply would result in the fall in the price of cannabis.

The large increase in the supply would shift the supply curve from S to S1 which would cause the quantity to increase from Q to Q1 and the price to fall from P to P1. Thus, large increase in the supply would have the effect by a sudden drop in prices by 70% between 2014 and 2018.

Economics homework question answer, step 2, image 1

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