A market maker faces the following demand and supply for widgets.Eleven buyers are willing to buy at the following prices: $15,$14,$13,$12,$11,$10,$9,$8,$7,$6,$5.Eleven sellers are also willing to sell at the same prices.If the market maker wants to make three transactions,what should he ask (the buyers)

Question

A market maker faces the following demand and supply for widgets.Eleven buyers are willing to buy at the following prices: $15,$14,$13,$12,$11,$10,$9,$8,$7,$6,$5.Eleven sellers are also willing to sell at the same prices.If the market maker wants to make three transactions,what should he ask (the buyers)​

Quizplus · Accepted Answer

To make three transactions, the market maker needs to find a price at which he can buy from a seller and sell to a buyer for a profit. Looking at the demand and supply schedule, we see that the highest number of buyers and sellers willing to transact is at a price of $13.

Therefore, the market maker can buy from a seller at $13 and sell to a buyer at $13, making a profit on the bid-ask spread. This can be done three times since there are eleven buyers and eleven sellers at the $13 price level.

Asking for a higher price may result in fewer transactions since there are fewer buyers and sellers at each price level above $13. Conversely, asking for a lower price may reduce potential profits. Hence the best option is to go with $13.

A Market Maker Faces the Following Demand and Supply for Widgets.Eleven