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Competitive Markets Consider a village’s competitive market for rice. The daily market demand for rice (in...

Competitive Markets

Consider a village’s competitive market for rice. The daily market demand for rice (in bushels per day) is given by the equation:

P = 18 – 2Q

The market supply of rice is given by the equation:

P = 3 + Q

These equations are plotted below (with some labels missing that you will be asked to fill in):

Given this information, answer the following:

  1. (20 pts.) Using the equations for demand and supply given in the instructions above, find the value of the intercepts A, B, and C given in the figure above.
  2. (20 pts.) What is the price and quantity of rice in competitive equilibrium? (In other words, find P­­*and Q*.) Why is this equilibrium a Nash equilibrium?
  3. (20 pts.) Is the competitive equilibrium efficient? Why or why not?
  4. (20 pts.) Calculate producer and consumer surplus in equilibrium.
  5. (20 pts.) Suppose now that supply increases to P = 2 + Q. Recalculate consumer surplus given the new supply. (HINT: Intercept B has changed.) Has consumer surplus increased or decreased?
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