Answer:
Explanation:
The goal is to determine the profit-maximizing bid-ask spread per unit for a market maker. To accomplish this, the demand and supply schedule for units bought and sold must be calculated, as illustrated in the following table.
Price Quantity demanded by buyers Quantity sold by sellers
$14 1 11
$13 2 10
$12 3 9
$11 4 8
$10 5 7
$9 6 6
$8 7 5
$7 8 4
$6 9 3
$5 10 2
$4 11 1
However; since transactions occur concurrently, 11 individuals are involved in buying and selling.
Yet, only 10 participants can engage in a trade at most.
Individuals valuing the good higher will be able to purchase it, specifically those in the brackets of $14, $13, $12, $11, $10, $9. In contrast, those with lower valuations, those at $4, $5, $6, $7, $8, $9, will look to sell for the asking price.
In this situation, the individual valuing the good at $9 cannot participate because they occupy both sides; on the demand side, they have the lowest willingness to pay and on the sell side, they have the highest valuation. The market equilibrium is at $9 as at this price the quantity demanded equals quantity supplied.
Thus, we conclude that there are 5 transactions in achieving the maximum bid-ask spread per unit for a market maker.
