In a Certain City, the Demand Function for Crack Cocaine

question 12

Multiple Choice

In a certain city, the demand function for crack cocaine is q = 1,000 - p, where p is the street price. The cocaine industry is competitive. Cocaine distributors can buy as much cocaine as they wish at a price of $50 per unit from Colombian sources. Whenever the city narcotics police catch a cocaine dealer, they confiscate all the cocaine that he has. The jails are full so they do not imprison the dealers. The police are able to catch the dealers about half the time, so they get about half the cocaine that enters the city. Instead of destroying confiscated crack, the police simply resell it on the street. If the original supply curve of cocaine on the streets was horizontal, what is the net effect of police activities on the market for crack in this city?

• A) The amount purchased on the street is about 50 units smaller than it would be with no enforcement.
• B) There is no effect, since all of the drugs reach consumers anyway.
• C) Crack dealers will stop dealing in this city altogether, since they can make more money elsewhere.
• D) The amount of crack purchased on the street decreases by about half.
• E) The quantity purchased by dealers rises to make up for the amount that is confiscated.

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Definitions:

Liabilities and Net Worth

The total of all debts and obligations owed by an entity minus its total assets, portraying the entity's financial health and capital.

Efficient Market Hypothesis

The theory that all available information is already reflected in asset prices, thereby making it impossible to consistently achieve higher returns.

Passive Portfolio Management

An investment strategy that seeks to replicate the performance of a market index, minimizing buying and selling actions.

Combined Liabilities

The total amount of obligations or debts that a company or an entity owes to others, consolidated into a single figure.