Topic 9: Rational Addiction Model

Question 1

Is addiction rational?

Answer 1

It depends how you model it. You can make a utility model that has a discount rate for future utility. Not a very smart person, but ‘rationally’ modelled

Question 2

Explain the Becker & Murphy addiction model

Answer 2

• Consuming an addictive good builds a stock of addiction, which increases desire for future consumption.
• Utility from a given amount of consumption is lwoer when stock is higher
• The stock depreciates at some rate

Question 3

What two qualaties must an addictive good have in the Becker-Murphy model?

Answer 3

• reinforcement (past consumption -> desire for more consumption)
• tolerence (past consumption -> lower utility from present consumption)

Question 4

What are the implications of the Becker model?

Answer 4

• ‘rational addicts’: those with a high discount rate (don’t care how shit their future is) might ‘rationally’ chose to become addicted
• long run utility is low
• when prices rise too high, the optimal strategy might be to go cold turkey. Explains why some addicts will do this, rather then gradually decreasing consumption to nothing.

Question 5

Graph the Becker-Murphy addiction model. Explain the meaning of the curves

Answer 5

x
A’ represents the level of consumption desired given a level of addictive stock, all else held equal. The depreciation curve (cS) shows theconsumption required to maintain the current level of addictive stock.

Question 6

x

Why is point E an unstable equilibrium?

Answer 6

Because being just to the left or just to the right of E will cause the consumer to move away from point E, as their addictive stock decreases or increases respectively. Because any slight change in consumption will move the individual away from the equiilibrium, it can be considered unstable.

Question 7

X

Why is point D a stable equilibrium?

Answer 7

On the other hand, to the left of D, depreciation of addictive capital is lower then consumption, so addictive capital will increase until the indervidual is at point D. LIkewise, to the right of D, depreciation is above consumption, so addictive capital will decrease back to point D. As the equilibrium at D is tolerent to slight, and even major variation in consumption / addictive capital, it can be considered stable

Question 8

How can cigarette advertising be modelled?

Answer 8

• Adertising as a barrier to entry
• Advertising as inducing demand
• Advertising as a complementary good <- favoured model

Question 9

Comment on the price elasticities for Cigarettes

Answer 9

Short run: -0.3 -0.5
Long run: -0.5 -0.6
Youth: -0.67

Question 10

What are the price elasticities for Marijuana, Cocain & Heroin?

Answer 10

Marijuana: -0.3
Cocaine: -1.0
Heroin: -0.89

Question 11

What are the long run & short run price elasticities for alchohol?

Answer 11

Short run: -0.518

Long run: -0.816