Question

Please explain how they got the answer

10. ​A market maker faces the following demand and supply for widgets. Eleven buyers are willing to buy at the following prices: $15, $14, $13, $12, $11, $10, $9, $8, $7, $6, $5. Eleven sellers are also willing to sell at the same prices. If the market maker makes three transactions, what is his total profit?

• ​$18

Answer 1

There are eleven buyers (consumers) and eleven sellers (producers) in the market. Consumers are willing to pay the following prices (given in the table below) that represent their willingness to pay (WTP) for the good concerned. The table also gives the price at which producers are willing to sell their goods, that is, their willingness to accept (WTA). The buyer's WTP and supplier's WTA move in the inverse proportion.

The equilibrium price for the good is where WTP equals the WTA. Thus, the equilibrium price is $10. When the market maker wants to make three transactions, the bid price he will charge is the lowest price that the seller is willing to take for his goods and the asking price is the buyer's highest WTP for that unit of goods. With the equilibrium price of $10, the seller's minimum WTA for three goods is $7 and the buyer's maximum WTP for three goods is $13. Thus, the bid price is $7 and the ask price is $13. The bid-ask spread is the difference in the ask price and bid price and it represents the market maker's profit. The market maker's profit on each transaction will be $6 ($13 - $7). On three transactions, the market maker's total profit will be $18 (6*3)