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 shortage forces buyers to offer bribes to the seller in order to secure a loaf. If each buyer offered as much as his or her reservation value, and the seller sells to the highest bidders, how many loaves will exchange hands' Is the outcome efficient?

Question

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 shortage forces buyers to offer bribes to the seller in order to secure a loaf. If each buyer offered as much as his or her reservation value, and the seller sells to the highest bidders, how many loaves will exchange hands' Is the outcome efficient?

Quizplus · Accepted Answer

If each buyer offers as much as their reservation value and the seller sells to the highest bidders, the number of loaves exchanged will be determined by the quantity supplied at the price ceiling. Assuming the price ceiling is set below the equilibrium price, the quantity supplied does not change; it remains at the level determined by the seller's capacity or willingness to sell at that price. The outcome is efficient in the sense that the loaves are sold to those with the highest reservation values, maximizing total surplus under the given constraints. However, the presence of a price ceiling and the need for bribes indicate market inefficiencies and distortions not captured by this simple analysis.

The Table Below Shows the Reservation Values of Ten Buyers