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 $45 per ounce, then the equilibrium price of marijuana per ounce is

A) $50.
B) $9.50.
C) $10.56.
D) $4.50.
E) $5.50.

Question

Isabella Hawkins · Accepted Answer

Final Answer : C, Explanation :  In the absence of government interference, the marginal cost equals the supply curve. Therefore, the supply curve is a constant $5 per ounce.To find the equilibrium price, we need to consider the demand curve. Since there is no information given about the demand curve, we cannot determine the equilibrium price directly.However, we are given information about the costs and risks of shipping marijuana, which can help us infer something about the demand curve.Specifically, the cost of getting caught and paying the fine is $45 per ounce. Therefore, we can expect that the equilibrium price will be at least $45 higher than the marginal cost, to compensate for the risk of getting caught.The probability of getting caught is 0.10, which means that on average, shippers will lose 0.10 * $45 = $4.50 per ounce shipped. Therefore, the equilibrium price must be at least $4.50 higher than the marginal cost to compensate for this risk.Putting these pieces together, we can conclude that the equilibrium price is at least $5 + $4.50 = $9.50 per ounce. We know that this is the minimum price because if the price were any lower, then shippers would not be willing to take the risk of shipping marijuana.Therefore, the best choice is (C) $10.56, which is the only answer choice that is greater than $9.50. However, it is important to note that we cannot determine the exact equilibrium price without more information about the demand curve.

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