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 is seized is .10 and the fine if a shipper is caught is $25 per ounce, then the equilibrium price of marijuana per ounce is

Question

Quizplus · Accepted Answer

The equilibrium price can be calculated by adding the constant marginal cost of $5 to the expected cost of the fine. The expected cost of the fine is the probability of seizure (0.10) times the fine amount ($25), which equals $2.50. Adding this to the marginal cost ($5) gives an equilibrium price of $7.50. However, to cover this cost and maintain their profit margin, sellers would adjust the price upwards. The correct calculation should factor in how the expected fine influences the final price, leading to an equilibrium price of $8.33, indicating a slight misunderstanding in the initial calculation explanation.

In the Absence of Government Interference, There Is a Constant