Question

Assume the demand for crack cocaine is inelastic and that users get the funds to pay for their crack by stealing. Suppose that the government increases penalties on suppliers of crack cocaine, which reduces the number of dealers. Using only this information, predict what will happen to the revenues of remaining crack dealers and the amount of crime committed by crack users.

Answer 1

Answer:

Total Revenue of Cocaine will increase.

Explanation:

Elasticity of demand is demand responsiveness to price change.

Price & Total Revenue have relationships as per Elasticity of Demand :

• Elastic Demand >1 : Change in quantity demanded  >  change in price ; Price & Total Revenue negatively related.
• Inelastic Demand < 1 : Change in quantity demanded < price change ; Price & Total Revenue positively related

Given : Demand for crack cocaine is inelastic. If government increases penalties on cocaine supply, number of dealers decrease.

Then , the supply of cocaine will fall. Supply Shortage will increase the price. However - because demand is inelastic , total revenue will increase as a result of price rise.