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 seized is .30 and the fine if a shipper caught is $50 per ounce, then the equilibrium price of marijuana per ounce is

A) $28.57.
B) $20.
C) $55.
D) $3.50.
E) $6.50.

Question

Akshat Sahai · Accepted Answer

Final Answer : A, Explanation :  The equilibrium price can be calculated by adding the expected cost of the fine to the marginal cost. The expected cost of the fine is the probability of seizure (0.30) times the fine amount ($50), which equals $15. Adding this to the constant marginal cost of $5 gives a total of $20. However, this calculation does not directly lead to the options provided. The correct approach involves understanding that the equilibrium price must cover both the cost of production and the expected cost of fines due to seizures. Given the misunderstanding in the initial explanation, the correct calculation should consider how the market adjusts prices to ensure sellers receive a net of their cost including the risk of fines. If the fine is $50 per ounce with a 0.30 probability, the expected fine per ounce is $15, making sellers require $20 to cover costs and fines. However, to find the equilibrium price that includes this expectation, we recognize an error in the initial calculation that does not match the provided options directly. The correct equilibrium price would ensure sellers net $20 after considering the risk of fines, suggesting a need to reevaluate the options with a correct formula that accounts for how sellers would price the product to ensure they cover the $5 production cost and the expected $15 fine cost, leading to a reevaluation of the options provided.

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