Assuming equal expected penalties to buyers and sellers in the market for an illegal good, which of the following most accurately describes equilibrium price and quantity relative to the market for a legal good? Price / Quantity A) Same / Lower B) Same / Higher C) Lower / Lower D) Higher / Lower
i hate econ. my gut tells me D - but i’m pretty sure thats wrong. I’m starting to learn that whatever i think it should be, the opposite is usually true.
Answer should be A. D would be the answer if penalties are only imposed on the seller. However, because there is equal penalty for the buyer as well, the price reverts back to its original equlibrium price. Equilibrium shifts to the left.
I agree with that - if there was a penalty for the buyer, you’d want cheeper price per unit quantity to compensate you for potential legal expenses for being caught (think illegal downloads of music). If there was a penalty on the seller, you’d want to charge more to compensate you for the risk your taking. So both supply and demand curve shift to the left by the same amount so at the new equalibrium, price stays the same but qualtity is reduced
Yup price stay the same and lower quantity. to understand it, draw a downward sloping demand curve and unpward sloping supply curve and shit both of them to the left with same amount. you will realize the price stay the same and quantity dropped to new level. good luck
solution from QBank: The correct answer was A) Same Lower With an equal penalty to buyers and sellers, the vertical shift in both the supply and demand curve offset each other, and the price for the illegal good remains the same. The equilibrium quantity, however, is less than that for the legal good.
Bump Buyers/sellers for an illegal good: A good reminder. Short and sweet, both the supply and demand curve shift to the left by equal amounts establishing a new equilibrium. Therefore, price remains unchanged at a new level of quantity.