Question

Question 3. This question looks at what happens when markets do not clear. Suppose that the metropolitan museum of New York will display the works of Leonardo Da Vinci for one week. Each day one hundred people can view the exhibition so supply is fixed at that number. The Museum sets an admission price of $10.

Suppose that the demand to see the exhibit each day is Q^d = 400 – 10p.

1. How many people want to attend the exhibition at this price?

Suppose people must wait in line when there is excess demand to attend the exhibit? The opportunity cost of time is $10 per hour.

2. How many hours would you expect people to wait in line to see the exhibit?
3. Suppose the Museum gives a free ticket to David Gabel, the chair of the economics department. David values a trip to the exhibit at $20. What can he obtain for his ticket if he sells it on the black market?
4. Suppose that the Museum decides to raise the price to $30. What is the loss in consumer surplus to consumers arising from the increase in price?

Answer 1

Answer 3:  Demand equation for each day Q^D = 400-10 p

Admission Price p = $10

a). Substituting the price in the demand function

Q^D = 400 - 10 *10

Q^D = 300

Each day the demand will be 300, and exibition is for 7 days:

Total demand Q = 300 * 7

=> Q = 2100 People want to see the exibition at p= $10

----------------------------------As per the guidelines 1st question is complete-----------------------------------------------

Suppose people must wait in line when there is excess demand to attend the exhibit. The opportunity cost of time is $10 per hour.

C = $10

a). The total cost after 1 hour waiting = price of museum + opportunity cost

=> $10 + $10

=> $20 , every hour of wait will increase this price by $10.

From the demand function, we can find the total cost at which the Q^D will become 0

=> 0 = 400-10 * P

=> P = $40, here $10 is the price of museum, and $30 is opportunity cost.

Hence people will wait for maximum 2 hours.

-------------------------------------------------------------------------------------------------------------------

As per the guidelines 1st question is done.