Exercise 2: Market Equilibrium and Efficiency

Exercise 2: Market Equilibrium and E'iciency (30 points) Consider a market with four buyers and four sellers. Each buyer wishes to purchase at most two units of the good, but each seller can only produce and sell at most one unit. The buyers' values (willingness to pay) and sellers' cost are in given in Table 1. Buyers' values (per unit of the good)) Sellers' costs 3 1 2 2.5 4 1.5 5 2.5 Table 1: Buyers and Sellers 1) Suppose that we want both to be fair and to maximize the number of trades in this market. Calculate the total gains from trade generated if each buyer gets a unit of the good. {5 points) 2) Draw the supply and demand curves. ( 5 points) 3) A market equilibrium is a pair (P*, Q\") such that supply is equal to demand at the prevailing price P*. Find the market equilibrium price and quantity. Explain how you reached your answer. (10 points) 4) Calculate the consumer surplus, producer surplus and the total surplus in equilibrium. Compare your answer to 1). Is the market equilibrium efcient? Explain. {10 points)