There are five buyers and five sellers in a perf
There are five buyers and five sellers in a perfectly competitive market. Each buyer wishes to purchase one single unit of the good. The willingness to pay displayed by these buyers is presented in the following table:
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Buyer 12345 Willingness to Pay $4 $8 $2 $5 $7
Each firm sells also only one unit of the good. The cost of producing that unit for these firms is denoted by the following table:
Seller 12345 Production Cost $7 $2 $3 $5 $4
a) Suppose that the price for this good is set as P = 3. Is there excess demand or supply in this market? Explain.
b) Assumethatincaseofindifferencebothsellersandbuyersproceedtosupplyand demand in this market. What is the equilibrium quantity we will observe in this market and the range of prices that would support that quantity? Explain.
c) Determine the value of the maximum total surplus that we can observe in this market. Explain.
A perfectly competitive market where the laws of demand and supply hold is in equilibrium. Answer the following questions.
c) Suppose finally that less buyers take part in this market. The price elasticity of supply is estimated to be εQs,P = 1/4. What happens to the total revenues earned by sellers? Explain and illustrate the change occurring in those revenues on a graph.
b) Supposenowthatproductioncostsincreaseinthismarket.Thepriceelasticityof demand is still estimated to be εQd,P = 3/2. What happens to the total expenditures incurred by consumers? Explain and illustrate the change occurring in those expenditures on a graph.