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 Qd = 400 – 10p.

a.   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.

b.   How many hours would you expect people to wait in line to see the exhibit?
c.   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?
d.   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

Solution: a) By putting P=10 in the equation of Qd , we will get the quantity demanded = 300 people ( number of people who wants to attend the exhibition)

b) Answer to this would be 2 hours

c) Price should be equal to or higher than $20. and it can to a maximum of $39.9

When demand is matched to supply, i.e only 1 ticket is equal to Qd, David will obtain $39.9 for his ticket.

d) Loss in consumer surplus would be $4000