Question

10. The government of Queensland is very serious about drugs. Possession of drugs is illegal and is severely penalized. However, a black market exists which the government has failed to dismantle despite serious attempts. Mr. Green, the health minister, is worried about the situation. In early 2009, a consultant working with health ministry suggested that the government should increase the price of a pack of cigarettes from 200 Queensland dollars (S$) to S$600. A survey conducted in December 2009 suggested that over the year, the quantity demanded of marijuana decreased from 2,000 kgs per day to just 800 kgs. Calculate the cross elasticity of demand for marijuana and explain why the policy is effective or ineffective. Show your work.

Answer 1

Answer 10

This Policy will be effective if Cross price elasticity of demand is elastic i.e. Absolute value of Cross price elasticity of demand > 1. A policy will be effective if Change in price result in higher change in quantity and this is possible if demand is elastic.

Cross price elasticity(P^c) using mid point method :

where Q₁ = new demand 800 , Q₀ = Initial demand 2000, P₀ = Old Price of cigarettes(related good) = 200 and P₁ = New Price of cigarettes(related good) = 600

=> P^c = -0.86

Hence, Cross price elasticity of demand = -0.86 which is inelastic and hence, This policy is ineffective.