Question

There are 30 sellers, each of whom has a house to sell. Each seller values his house at 10,000 Dollars. That is, they are willing to sell their houses as soon as someone offers to them a price above 10,000 Dollars. There are 10 buyers. Each buyer is willing to pay up to 100,000 Dollars for a house. All 10 houses are identical from the buyers’ point of view.What market outcome (prices and quantities) does the law of demand and supply predict for this market? Is the market outcome fair? (Before you answer the second question,reflect on the notion of fairness. Explain in one paragraph what you mean by fairness,and in a second paragraph answer the question whether the market outcome is fair.)

Answer 1

The law says that supply and demand will meet at 10000 only. Only 10 houses will be sold since there are only 10 buyers. Without involving value judgement we say fairness is the situation where mc=marginal benefit or total surplus is maximised. Given demand of only 10 the outcome is fair. But if we involve value judgments we can say that some suppliers who fail to get buyers are not well. But it must be said that given the supply only ten suppliers will get buyers. They will be those who keep prices at 10000 and are able to negotiate with buyers immediately