11. The market for widgets has three potential buyers and three potential sellers. Once a person has a widget, there is no use for another. The willingness to pay and willingness to sell tables are as follows:
Potential Buyers |
Highest price each will pay |
Potential Sellers |
Lowest price each will accept |
Jack |
$100 |
Mark |
$10 |
Jim |
$75 |
Mike |
$25 |
Joe |
$51 |
Mort |
$49 |
a) If the price in this market is $55, will the market clear, or will there be potential transactions left that could make someone better off?
b) If the price of all transactions is known in the market, what will tend to happen to the price in this market if it begins at $55?
c) If the price in the market is $45, will the market clear? If knowledge of prices is known, what will happen to price?
d) If the price in the market is $50, will the market clear? What is the total surplus (producer plus consumer surplus) that exchange will generate?
e) If prices below $55 are illegal, how many will be exchanged? What is the largest the surplus can be with this price floor?
f) Could the three sellers get together and think of a way to make themselves better off by colluding? What would they do? What would happen to the surplus of the buyers? Of the sellers? To total surplus?
g) Suppose there are three hundred Jacks, Jims, Marks, etc. Will collusion be more or less likely than with there are only three buyers and three sellers? Explain.
h) Does the size of the surplus depend on whether the good being exchanged is socially acceptable or not? For example, if widgets are a form of pornography, do the answers change?
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