Competitive Markets Consider a village’s competitive market…
Competitive Markets Consider a village’s competitive market for rice. The daily market demand for rice (in bushels per day) is given by the equation: Q = 9 – ½P or (equivalently) P = 18 – 2Q The market supply of rice is given by the equation: Q = P – 3 or (equivalently) P = 3 + Q These equations are plotted below (with some labels missing that you will be asked to fill in): Given this information, answer the following: (3 p.) Using the equations for demand and supply given in the instructions above, find the value of the intercepts A, B, and C given in the figure above. (3 p.) What is price and quantity of rice in competitive equilibrium? (In other words, find P* and Q*.) Why is this equilibrium a Nash equilibrium? (3 p.) Is the competitive equilibrium efficient? Why or why not? (3 p.) Calculate producer and consumer surplus in equilibrium. (3 p.) Suppose now that supply increases to Q = P – 2 or equivalently P = 2 + Q. Recalculate consumer surplus given the new supply. (HINT: Intercept B has changed.) Has consumer surplus increased or decreased?