Health Economics

Running head: HEALTH ECONOMICS
Health Economics
Student’s name
Institution

1 (a) The figure below is an indifference curve showing a utility maximization problem for
consumers of alcohol and marijuana. The budget constraint is illustrated by line PL and hence
consumers have to optimize their consumers within the budget. Originally, the optimum
consumption of alcohol and marijuana are Y units and X units. The equilibrium point is
located at point e. At equilibrium point e, market demand and market supply are equal and
therefore exist no surplus or deficit.
Figure 1
(b) When government raised penalties for teenagers taking alcohol, a substitution effect
occurred due to increase in prices of alcohol (Dewett, 2015). Generally, individuals consume
more of a normal good at lower prices and less at higher prices. Consumption of alcohol

reduces to Y1 units while that of marijuana rises to X1. The new optimal consumption point
is e1 which is within the budget of the consumers.
Figure 2
3. (a) Figure 3 below shows the original equilibrium curve of antihistamine. The equilibrium
point is the point at which S1 and D1 intersect. At the equilibrium point, equilibrium quantity
is Q1 while equilibrium price is P1.