Question

In: Economics

Scenario: Suppose a competitive market has ten buyers and ten sellers.

buyerreservation value of buyer ($)sellerreservation value of seller($)
11511
21422
31334
41246
51158
610610
79712
88814
97916
1061018

Scenario: Suppose a competitive market has ten buyers and ten sellers. The product exchanged in this market is beach hats, which are indivisible. The following table shows the reservation values for both buyers and sellers.

a) Refer to the scenario above. If the market is perfectly competitive, the equilibrium price of a hat is?

b) Refer to the scenario above. If the market is perfectly competitive, the equilibrium quantity of hats is?


Solutions

Expert Solution

Price Demand Supply
1 10 1
2 10 2
4 10 3
6 10 4
7 9 4
8 8 5
9 7 5
10 6 6
11 5 6

We have computed the demaand and supply schedule where we determined the demand and supply at each price. For eg: At $1, all buyers have reservation value greater than 1 so all of them will demand the good but only one seller has reservation value of1 or less than 1. So, only one seller will supply the good.
At $2, all buyers have reservation value greater than 2 so all of them will demand the good but only two seller have reservation value of 2 or less than 2. So, two seller will supply the good.

Equilibrium is determined where demand equals supply. We can see that at $10, demand = supply = 6. So, equilibrium price of a hat is $10 and equilibrium quantity is 6 hats.

Rahul Sunny answered 1 year ago
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