Suppose that Fon and Cartoon from trade with each other at the market clearing p
ID: 1180004 • Letter: S
Question
Suppose that Fon and Cartoon from trade with each other at the market clearing price of $5.
The table shows the minimum amount Cartoon would take to voluntarily give up each unit of the good they sell (Willingness to Accept) and the maximum amount Fon would be willing to pay for each unit of the good she buys (Willingness to Pay).
For instance for the first unit of the good Cartoon sells she wouldn't sell unless she got at least $2 for that unit.
For the first unit of the good Fon buys, she would pay no more than $10 for that unit.
The last column of the table shows the collective gain from trade that Fon and Cartoon will get from exchanging that unit of the good.
Willingness to Pay or Accept for a Given Unit
Unit
Cartoon (supplier)
Fon (demander)
Gain from Trade on unit.
1
2
10
A
2
3
9
B
3
3
9
C
4
4
8
D
5
4
8
F
Total
G
Fill in the numbers in the last column.
The value for A (the first unit of the good exchanged) is?
The value for B, C, D, F, G?
Willingness to Pay or Accept for a Given Unit
Unit
Cartoon (supplier)
Fon (demander)
Gain from Trade on unit.
1
2
10
A
2
3
9
B
3
3
9
C
4
4
8
D
5
4
8
F
Total
G
Explanation / Answer
Assume that for every unit of the good, Fon can buy the good by paying Cartoon his minimum willingness to accept. Since Fon's maximum willingness to pay>>Cartoon's minimum willingness to accept, for all units, all units from 1-5 will be bought and sold.
Gain from unit 1=A = Gain to Fon + gain to Cartoon = [Maximum willingness to pay-Price paid]+[Price received-Minimum willingness to accept] = [10-2]+[2-2]=$8.
Gain from unit 2 =B = Gain to Fon + gain to Cartoon = [Maximum willingness to pay-Price paid]+[Price received-Minimum willingness to accept] = [9-3]+[3-3]=$6.
Gain from unit 3 =C = Gain to Fon + gain to Cartoon = [Maximum willingness to pay-Price paid]+[Price received-Minimum willingness to accept] = [9-3]+[3-3]=$6.
Gain from unit 4=D = Gain to Fon + gain to Cartoon = [Maximum willingness to pay-Price paid]+[Price received-Minimum willingness to accept] = [8-4]+[4-4]=$4.
Gain from unit 5=F = Gain to Fon + gain to Cartoon = [Maximum willingness to pay-Price paid]+[Price received-Minimum willingness to accept] = [8-4]+[4-4]=$4.
Total Gain = A+B+C+D+F = 8+6+6+4+4 = $28.