Part 1

Suppose eggs are only sold by the dozen and priced in whole dollar amounts. No eggs are demanded at a price above $7 per dozen. At a price equal to $7 per dozen, 10 dozen eggs are demanded. If the price falls to $6 per dozen, then 11 dozen are demanded. At a price of $5 per dozen, 12 dozen are demanded. When the price falls to $4 then 13 dozen are demanded.

Suppose also that this market is operating in the short run and the quantity of eggs supplied is fixed at 12 dozen eggs.

What are the equilibrium price and quantity in this market?

What is the total consumer surplus in this market at this equilibrium price?

Part 2:

Suppose a competitive market is in equilibrium. Assume the demand in this market can be represented by the equation:

P=9Q(andthusQ=9P)P=9Q(andthusQ=9P)

and that the supply can be represented by the following equation:

P=QP=Q

Calculate the equilibrium price and quantity in this competitive market. (Hint: At equilibrium, the quantity demanded is the same as the quantity supplied.) What are the equilibrium price and quantity in this competitive market? Describe how this reflects efficiency.

We have learned that sometimes markets are not fully competitive and that market power can become concentrated in the hands of a few sellers who seek to increase profits by reducing output and increasing price. Suppose that this market becomes less competitive and as a result output is restricted to 3 units and price is increased to $6 per unit of output.

Calculate consumer surplus, producer surplus, and the sum of consumer and producer surplus under the equilibrium price and quantity when the market is competitive. Next calculate consumer surplus, producer surplus, and the sum of consumer and producer surplus at the restricted output of 3 and higher price of $6.

By how much did total surplus fall when the market became less competitive? This is often referred to as the deadweight loss of imperfect competition. Other market failures such as externalities can also cause a deadweight loss. The next module will explore the deadweight loss associated with a tax.

It may help you to draw a graph on scratch paper when answering this question, and recall that the area of a triangle is one half of the product of base times height.