Scenario: The table below shows the reservation values of ten buyers and a seller for a loaf of bread. Each buyer would buy at most one loaf and the seller can make up to ten loaves. Initially trades happen under the market mechanism with each agent making a decision according to the market price and his or her own reservation value. Then the government imposes a price ceiling of $1.00 per unit.

-Refer to the scenario above.Suppose that,after the price ceiling is imposed,the seller uses a lower quality flour that reduces his marginal cost by $0.50 for each loaf.Buyers suspect that the quality may be lower,and their reservation value falls by $0.25.At the legal price,there will be ________.

Question

Scenario: The table below shows the reservation values of ten buyers and a seller for a loaf of bread. Each buyer would buy at most one loaf and the seller can make up to ten loaves. Initially trades happen under the market mechanism with each agent making a decision according to the market price and his or her own reservation value. Then the government imposes a price ceiling of $1.00 per unit.
 
-Refer to the scenario above.Suppose that,after the price ceiling is imposed,the seller uses a lower quality flour that reduces his marginal cost by $0.50 for each loaf.Buyers suspect that the quality may be lower,and their reservation value falls by $0.25.At the legal price,there will be ________.

Quizplus · Accepted Answer

When the seller uses lower quality flour, his cost of production reduces by $0.50 per loaf. Hence, he is willing to supply more at the same price as before. However, buyers suspect lower quality and their reservation value falls by $0.25. So, they are willing to buy only at a lower price. As a result, at the legal price ceiling, there is excess demand for bread, i.e., quantity demanded is greater than quantity supplied. This leads to a shortage of 1 loaf.

Scenario: the Table Below Shows the Reservation Values of Ten