Demand with zero transaction costs is Q1D = 50 -P and supply is Qs = -7 + 2P. a)

Question

Demand with zero transaction costs is Q1D = 50 -P and supply is Qs = -7 + 2P.

a) Verify all of the prices and quantities calculated in the discussion.

b) Now assume that intermediaries come from a competitive market with an equilibrium price of $8 per unit for their services, that is, any buyer or sellerwho wants an intermediaries services must pay $8 for them. What is the maximum per unit that sellersare willing to pay intermediaries if hiring them saves buyers $8 in transaction costs?

c) Does your answer to Q 16A change if buyers pay $8 per unit to the intermediary but sellers offer to rebate part of that expense to buyers?

Explanation / Answer

a) QD = 50 - P Qs = -7 + 2P For equilibrium- QD = Qs 50 - P = -7 + 2P 57 = 3P P = 19 Thus, equilibrium price = $19 Equilibrium quantity = -7 + 2x19 = 31 units. b) Intermediaries come from a competitive market with an equilibrium price of $8 per unit for their services, that is, any buyer or sellerwho wants an intermediaries services must pay $8 for them.

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