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Question : 7. Washington State decides to introduce a tax the sale : 852

7. Washington State decides to introduce a tax on the sale of marijuana. Assume the elasticity of demand is -0.5, and that supply is perfectly elastic. a) If the tax increases the price of marijuana by 60 what will happen to the amount that is sold? b) Suppose marijuana is addictive, and that consumers who choose to buy it are rational addicts. Explain what the theory of rational addition predicts will happen to the quantity sold today if the tax increase begins next year (Note: the theory of rational addiction says nothing about stockpiling goods to avoid paying taxes, so that is not the answer I am looking for.

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Solution
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