Competitive markets

Suppose that all of the numbered diamonds and spades from a deck of cards (excluding ace, king, queen, and Jack) are used to set up a market. The diamonds determine demand, e.g., a 10 represents a buyer with a redemption value of $10. Similarly, the spades determine supply. There are 9 buyers and 9 sellers, each with a single card.

(a) Graph supply and demand and derive the competitive price and quantity predictions. (Go to free graph paper on the web to get graph paper.)

(b) Compute consumer and producer surplus. Hint: if the competitive P or Q is in an interval, assume a unique P or Q at the midpoint of that interval.

(c) What is the predicted effect of a supply shift that results from removing the 3, 4 and 5 of spades? Show your work.

(d) Suppose that a price ceiling of 4 is imposed. Draw that into your figure in (a). Compute the new consumer and producer surplus and the minimum impact on economic efficiency.

(e) Can the efficiency loss be greater than this? Explain.