Suppose Jane lives in Kentucky, and at the start of each month Jane selects thequantity of bourbon (B) and fried chicken (C) that she will consume during thatmonth in order to maximize her utility. Suppose you are given the followinginformation about the choices Jane makes each month for a three-month period when she faces the following prices and income:

	Quantity of bourbon	Quantity of Fried Chicken	Price of Bourbon	Price of Fried- Chicken	Income
Month 1	10	20	40	10	600
Month 2	7	18	60	10	600
Month 3	8	32	60	10	800

1. Using the midpoint method and the information in the table, calculate Jane's Priceelasticity of demand forbourbon.Is Jane's demand for bourbonelastic or inelastic? Interpret thepriceelasticity in words.[Hint:When calculating how responsive quantity demanded is to a change in price, you need to make sure that all other variables that affect demand, i.e. prices ofother goods and income, are being held constant]

B. Using the midpoint method and the information in the table, calculate Jane's cross-priceelasticity of demand forfried chicken and bourbon. Does Jane view these two goods as complementsor substitutes?

2. Assume that if drugs (like marijuana, cocaine, and heroin) were legalized, thesupply curve would shift down and to the right because the business of drugswould become less risky and less expensive.

a.Would you expect the demand curve to shift if drugs were legalized? Why orwhy not?

b.Given the supply shift and your answer to (a),what would happen to the drug price and quantity consumed if legalized? Use a graph to illustrate your answer.

c.Many people believe that the demand for drugs is price inelastic for addictedusers and price elastic for young or occasional, recreational users.Whatwould happen to the total revenue of drug sellers whosecustomers areaddicted? What would happen to the total revenueof sellers whose customers are casual users?Assumethat the price of drugs falls when they are legalized.[Recall: Revenue = P x Q]

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Answer A Calculating Janes Price Elasticity of Demand for Bourbon To calculate the price elasticity of demand for bourbon we can use the midpoint formula Price Elasticity of Demand change in quantity ... View the full answer