Question

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. b) What is the predicted effect of removing the 3, 4, and 5 of Spades?

Answer 1

A deck of cards with solely numbered diamonds and spades is used to set up a market. The diamonds indicate demand, since number 2 symbolizes a buyer willing to spend $2, number 3 represents a buyer wanting to pay $3, and so on until number 10. Similarly, the spades determine supply in that number 2 denotes a seller prepared to accept a price of $2. There are nine buyers and nine sellers, each with one card. (See the attached graph)

What is the equilibrium price and quantities?

A) The graph of supply and demand is shown below. When demand matches supply at a price of $6, the equilibrium is reached. The competitive price is $6, and the equilibrium quantity is 6.

What is the predicted effect of removing the 3, 4, and 5 of Spades?

It is important to note that the type of trade that is taking place here is distinct. A number 2 spade is only prepared to sell to a number 10 diamond since it pays the biggest redemption.

Similarly, spade numbers 3, 4, and 5 are only prepared to sell to diamond numbers 9, 8, and 7. With their elimination, numbers 2 and 6 of spades will be able to sell to numbers 10 and 6 of diamonds, but the remaining spades will be left holding the bag.

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