### Exploring Exchange Efficiency

2. Suppose that John thinks one banana is worth four apples and Sue thinks one banana is worth two apples. If they both have apples and bananas, what trade will take place?

3. If some of the concerns of efficiency sound familiar, it may be because we have met them before, hiding under different concepts. In fact, one way to explore efficiency is with producer and consumer surplus.

Assume that the market for Windies is made up of the fourteen people shown in the following table. Seven do not have a Windie, and the maximum price they are willing to pay is shown in the first two columns. (Alice is willing to pay up to \$20 to get a Windie.) Seven people have a Windie, and the lowest price they will accept to sell their Windie is given in the last two columns. (If Holly is offered \$4.00 or more, she will sell.)

 Buyers Willingness to Pay . Sellers Minimum Acceptable Price Alice \$20.00 Holly \$4.00 Bill \$15.00 Ingrid \$4.00 Carol \$11.00 Jane \$5.00 Dave \$9.00 Karen \$7.00 Erin \$8.00 Larry \$8.00 Fred \$5.00 Mark \$12.00 Garth \$4.00 Nancy \$13.00

a) Ignore the sellers for a minute and consider only the buyers. If only one item is available and it is sold at auction, what price should it fetch?
b) Suppose that a price of \$12.00 is established and all transactions must take place at this price. How many will be exchanged? Explain how a mutually beneficial trade could be made at a different price.
c) Suppose that a price of \$5.00 is established and all transactions must take place at this price. How many will be exchanged? Explain how a mutually beneficial trade could be made at a different price.
d) Find the price at which it is impossible for any mutually beneficial trade to be made at any other price once it is established.
e) What is the equilibrium price and quantity in this market?
f) At this equilibrium, compute total value to buyers, total revenue, consumer surplus, and producer surplus.
g) Suppose the sellers collude so that Holly, Ingrid, and Jane agree to pay Karen \$4.10 and Larry \$3.10 to stay out of the market. Can they make enough extra with the higher price that will result to make these payments? What happens to consumer and producer surpluses? What happens to the sum of consumer and producer surplus?
h) Suppose that Alice, Bill, Carol, and Dave pay Erin \$1.10 to not buy. What happens to the price and to producer and consumer surpluses? Is this change good or bad? Explain.
i) Suppose that a government regulator sees this market and decrees that Nancy must sell to Alice (and Alice buy from Nancy), Mark and Bill must exchange, etc. If he pairs buyers and sellers in this way, the amount exchanged will be seven. Explain why this decree will be opposed by an economist.