Briefly describe how someone should deviate

Reference no: EM132207634

Question: Consider a trading network in which there are two buyers (B1 and B2), two sellers (S1 and S2), and two traders (T1 and T2). The sellers each have one unit of the object and value it at 0; the buyers are not endowed with the object, but they each want one unit and attach a value of 1 to one unit. Seller S1 and Buyer B1 can trade only with trader T1; seller S2 and Buyer B2 can each trade with either trader.

(a) Draw the trading network, with the traders as squares, the buyers and the sellers as circles, and edges representing pairs of people who are able to trade with each other. Label the nodes as T1, T2, B1, B2, S1, and S2.

(b) Consider the following prices and flow of goods: T1's bid price to Seller S1 is 0, his bid price to Seller S2 is 1/2, his ask price to Buyer B1 is 1, and his ask price to Buyer B2 is 1/2.

T2's bid price to Seller S2 is 1/2 and his ask price to Buyer B2 is 1/2. One unit of the good flows from Seller S1 to Buyer B1 through Trader T1; and, one unit of the good flows from Seller S2 to Buyer B2 through trader T2. Do these prices and this flow of goods describe an equilibrium of the trading game? If you think that the answer is No, then briefly describe how someone should deviate. If you think that the answer is Yes, then briefly explain (1-3 sentences) why the answer is Yes.

(c) Suppose now that we add a third trader (T3) who can trade with Seller S1 and Buyer B1. This trader cannot trade with the other seller or buyer, and the rest of the trading network remains unchanged. Consider the following prices and flow of goods: The prices on the old edges are unchanged from those in part (b). The prices on the new edges are: a bid of 1/2 to Seller S1 by Trader T3 and an ask of 1/2 to Buyer B1 by Trader T3. The flow of goods is the same as in (b). Do these prices and this flow of goods describe an equilibrium of the trading game? If you think that the answer is No, then briefly describe how someone should deviate. If you think that the answer is Yes, then briefly explain (1-3 sentences) why the answer is Yes.

Reference no: EM132207634

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