It costs suppliers $1 to produce each additional widget, and widgets sell for $2. Some consumers are not willing to pay $2 for a widget but are nevertheless willing to pay more than $1. Which of the following statements is TRUE?
A) The market is at equilibrium.
B) Suppliers must be reaping big profits.
C) There are unexploited gains from trade.
D) Consumers will bid up prices.

Question

Quizplus · Accepted Answer

The fact that there are consumers who are willing to pay more than $1 for a widget, but less than $2, indicates that there are unexploited gains from trade - i.e. there exists a mutually beneficial transaction between these consumers and suppliers that is not currently taking place. This suggests that the market is not yet fully efficient, and there is room for suppliers to increase production and sales to capture this additional demand. However, it cannot be concluded that suppliers are necessarily making big profits, nor that consumers will bid up prices - these depend on other factors such as the elasticity of supply and demand.

It Costs Suppliers $1 to Produce Each Additional Widget, and Widgets