There is a debate about whether sterile needles should be given out in cities with high drug use. Some say that doing so will decrease HIV/AIDS from sharing needles. Others believe it will encourage drug use. As an economist, you must know the following:
-How responsive the spread of HIV/AIDS is to the price of needles
-How responsive drug use is to the price of needles
Assuming you know these, use the concepts of price elasticity of demand for sterile needles, and the cross-price elasticity between drugs and sterile needles to answer the following:
a. In what circumstances do you believe distributing free needles is a beneficial policy?
b. In what circumstances do you believe distributing free needles is a bad policy?
Redo the above given the following:
SHIV/AIDS = 100 + 2Pn + Pd (supply function)
Ddrugs = 50 - Pn - Pd (demand function)
Pn = price of needles
Pd = price of drugs
Assume that HIV/AIDS is transmitted and spread entirely through drug use.
*All I know is that you have to compute the relevant point measures of elasticity at equilibrium prices.
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To answer these questions, we need to analyze the price elasticities of demand for sterile needles and the cross-price elasticity between drugs and sterile needles.
Price elasticity of demand measures how responsive the quantity demanded is to changes in the price of a particular good. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
Cross-price elasticity of demand measures how responsive the demand for one good is to changes in the price of another good. It is calculated as the percentage change in quantity demanded of one good divided by the percentage change in price of another good.
Using the given supply and demand functions, we can calculate the price elasticities at equilibrium prices. At equilibrium, the quantity supplied equals the quantity demanded.
Given the supply function: SHIV/AIDS = 100 + 2Pn + Pd, and the demand function: Ddrugs = 50 - Pn - Pd, we can find the equilibrium prices of needles (Pn) and drugs (Pd) by setting the quantity supplied equal to the quantity demanded:
100 + 2Pn + Pd = 50 - Pn - Pd
Rearranging the equation,
3Pn + 2Pd = -50.
Now, we can calculate the relevant point measures of elasticity at equilibrium prices, using the formulas:
Price elasticity of demand for needles (PEDn) = (% change in quantity demanded of needles)/(% change in price of needles).
Cross-price elasticity between drugs and needles (XED) = (% change in quantity demanded of drugs)/(% change in price of needles).
Using the calculated point measures of elasticity, we can answer the questions:
a. In what circumstances do you believe distributing free needles is a beneficial policy?
If the price elasticity of demand for needles (PEDn) is highly elastic (greater than 1 in absolute value) and the cross-price elasticity between drugs and needles (XED) is positive, then distributing free needles would be a beneficial policy. A highly elastic PEDn indicates that the quantity demanded of needles is highly responsive to changes in the price of needles. This means that providing free needles would significantly increase the quantity demanded, leading to a reduction in needle-sharing and potentially decreasing the spread of HIV/AIDS. A positive XED suggests that an increase in the price of drugs (decrease in the cross price of needles) would lead to an increase in the demand for needles. Thus, distributing free needles would also help detach drug use from needle-sharing and possibly lead to a decrease in HIV/AIDS transmission.
b. In what circumstances do you believe distributing free needles is a bad policy?
If the price elasticity of demand for needles (PEDn) is inelastic (less than 1 in absolute value) or the cross-price elasticity between drugs and needles (XED) is negative, distributing free needles may not be an effective policy. An inelastic PEDn implies that the quantity demanded of needles is less responsive to changes in the price of needles. Distributing free needles might not lead to a significant increase in the quantity demanded, potentially limiting the impact on HIV/AIDS prevention. A negative XED indicates that an increase in the price of drugs (decrease in the cross price of needles) would lead to a decrease in the demand for needles. In this case, giving out free needles might inadvertently increase drug use instead of deterring it, potentially worsening the drug problem.
To provide a definitive answer, we would need the specific values for PEDn and XED, which can be calculated using the equilibrium prices obtained from the supply and demand functions.