Three individuals have $1000 and identical preferences for gum,g,and cigarettes,s,as measured by the utility function U(g,s)= 10g^0.9a^0.1.The price of gum is $9 and the price of cigarettes is $12.What is the market surplus/shortage at a price of $12 when the supply of cigarettes is 5? A) There will be a shortage of 3 cigarettes. B) There will be a surplus of 3 cigarettes. C) There will be a shortage of 2/3 cigarettes. D) There will be a surplus of 2/3 cigarettes.

Question

Quizplus · Accepted Answer

At a price of $12, each individual will be able to purchase 5/12 packs of cigarettes or 5 cigarettes. Therefore, with a total of $1000, the total demand for cigarettes will be 125 cigarettes. However, with a supply of only 5 cigarettes, there will be a shortage of 120 cigarettes, equivalent to 3 packs. Therefore, the market will experience a shortage of 3 cigarettes.

Three Individuals Have $1000 and Identical Preferences for Gum,g,and Cigarettes,s,as