A market is composed of five demanders with the following reservation prices, $30, $25, $40, $75, and four suppliers' supplies with the following reservation prices, $75, $55, $80 and $85. Which of the following is a competitive equilibrium price?
A)$30
B)$40
C)$60
D)$50

Question

Quizplus · Accepted Answer

In a competitive equilibrium, the price is set such that the quantity demanded equals the quantity supplied. To find the equilibrium price, we need to order the demanders and suppliers from highest to lowest reservation prices:

Demanders: 
$75, $40, $30, $25

Suppliers: 
$85, $80, $75, $55

Starting with the highest reservation prices, we can see that the fourth supplier's reservation price ($55) is lower than the third demander's reservation price ($75), so we can eliminate the fourth supplier and move to the next highest reservation price. We can continue this process until we find the price at which the quantities demanded and supplied are equal.

At a price of $75, only one supplier (with a reservation price of $75) is willing to sell, but there are no demanders willing to buy at that price. At a price of $55, three suppliers (with reservation prices of $55, $75, and $80) are willing to sell, but only one demander (with a reservation price of $75) is willing to buy at that price. At a price of $40, two suppliers (with reservation prices of $55 and $75) are willing to sell, and two demanders (with reservation prices of $40 and $75) are willing to buy at that price. However, there are still three demanders that are not able to purchase at this price.

Finally, at a price of $60, all four suppliers (with reservation prices of $55, $75, $80, and $85) are willing to sell, and all five demanders (with reservation prices of $25, $30, $40, $75, and $75) are willing to buy at that price. This is the competitive equilibrium price where the quantity demanded equals the quantity supplied. Therefore, the answer is (C) $60.

A Market Is Composed of Five Demanders with the Following