Page 67 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes Thus at equilibrium,

MU = P and ...(i)
x
x
MU = P and …(ii)
y y
MU x P
or MU = x …(iii)
y P y
Then by cross-multiplying, we get
MU .P = MU .P …(iv)
x y y x
MU MU y
or x = …(v)
P x P y
And note by defi nition
MU x MU y
= = MU , which is constant …(vi)
P x P y m
Where,
MU = Marginal Utility of money
m
MU , MU = Marginal Utility of X and Y
x y
P , P = Unit price of X and Unit Price of Y respectively.
x y
The proportionality rule stated above (v) is the tenet of the Law of Consumer Equilibrium. The
assumption of diminishing marginal utility proportionality rule when considered along with
equi-marginal concept implies that a single price prevails for a commodity in the market. This is
true of a perfectly competitive market.

Caselet Should Canada Legalise Marijuana?

he war on drugs is an expensive battle, as a great deal of resources go into catching
those who buy or sell illegal drugs on the black market, prosecuting them in court,
Tand housing them in jail. These costs seem particularly exorbitant when dealing
with the drug marijuana, as it is widely used, and is likely no more harmful than currently
legal drugs such as tobacco and alcohol. There’s another cost to the war on drugs, however,
which is the revenue lost by governments who cannot collect taxes on illegal drugs. In a
recent study for the Fraser Institute, Canada, Economist Stephen T. Easton attempted to
calculate how much tax revenue the government of the country could gain by legalising
marijuana.
The study estimates that the average price of 0.5 grams (a unit) of marijuana sold for $8.60
on the street, while its cost of production was only $1.70. In a free market, a $6.90 profi t
for a unit of marijuana would not last for long. Entrepreneurs noticing the great profi ts to
be made in the marijuana market would start their own grow operations, increasing the
supply of marijuana on the street, which would cause the street price of the drug to fall to
a level much closer to the cost of production. Of course, this doesn’t happen because the
product is illegal; the prospect of jail time deters many entrepreneurs and the occasional
drug bust ensures that the supply stays relatively low. We can consider much of this $6.90
per unit of marijuana profit a risk-premium for participating in the underground economy.

Unfortunately, this risk premium is making a lot of criminals, many of whom have ties to
organized crime, very wealthy.
Contd...

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