Exchange and trade

Answer each question “true”, “false”, or “uncertain”, and explain your answer briefly. Your grade will depend heavily on your explanation.

A competitive firm will increase output as the result of a fall in the price of one of its inputs.

In equilibrium, a competitive firm has all the business (sales) it wants. Hence advertising is incompatible with either competition or equilibrium.

Duopolists with different cost functions cannot achieve a monopoly price without transfer payment between the firms.

A multiplant firm will schedule its output so that the marginal costs are equal in all plants.

The price of haircuts in Chicago is approximately 40 percent higher than in New York; therefore, average earnings of barbers in Chicago are higher than in New York.

The supply curve of a monopolist is inelastic at the point of maximum monopoly profit.

If it takes one day to catch a beaver and two to catch a deer, one deer will exchange for two beavers.

Assume that the world demand elasticity for tin is -2 and that Bolivia produces 1/3 of the world’s tin. Therefore, the elasticity of demand for Bolivian tin is at least -6.0 (in absolute value).

A safety ordinance prohibiting the use of automobiles older than 10 years will increase the long run demand for new automobiles.

The own-price elasticity of demand for a commodity is no smaller in absolute value, than the marginal propensity to consume that commodity.

For a single consumer the sum of income elasticities of demand for all commodities is unity, while the sum of their price elasticities is zero.

It is a convention in economics to draw consumption indifference curves convex to the origin, but we have no way of knowing whether they really are.

If it takes one day to catch a beaver and two to catch a deer, one deer will exchange for two beavers.

Imagine a community of individuals engaging in private production but where the idea of market exchange had not yet been discovered. Explain analytically the nature of the gains available after the discovery of exchange possibilities. Would every member of the community benefit, or might some be harmed as a result of the discovery?

Imagine a community of two individuals. Individual A’s endowment shows him rich in good X and relatively poor in good Y. Individual B’s endowment is just the opposite. Heretofore unknown exchange opportunities become available and known and the exchange rate for good X and Y that appears (it matters none to you from whence this exchange rate come) is equal to neither A nor B’s subjective exchange rate. Explain analytically the nature of the gains from exchange. Would each member of the community benefit from exchange or is there a possibility that a lose might be incurred? Why?

Evaluate. “Chinese labor is far less productive than American labor as evidenced by the fact that it takes so of it to get jobs done. One the other hand, American wheat land is less fertile than wheat land in Europe (e.g., France) as evidenced by the lower yield per acre in the United States.”

What are the essential characteristics of exchange opportunities and production opportunities, on the social levels?

Exchange consists of acts which allow the possibility of trading endowment elements with other members of society– exchange opportunities only arise in a social context. Production opportunities represent alternative combinations attainable by transformation or dealing with nature. In exchange, the quantity supplied of a commodity must equal quantity taken –i.e., algebraic sum of supply and demand must equal zero for every commodity. Exchange conserves the social totals of commodities. Production alters the social totals, i.e., less of some goods, more of others.

Assume a simple competitive economy with J individuals and 2 goods X and Y. Both production and exchange can take place. Every individual has identical tastes and opportunities (so that the single-individual solution will be a miniature representation of the social solution). Assume, further, that all endowments consist only of the numeraire commodity, Y.

(a) Illustrate verbally and diagrammatically the determination of:

1. The production optimum, the amount produced, the total cost.

2. The consumptive optimum and the volume of trade.

3. The price, the marginal cost, and the marginal value in use.

4. The individual’s wealth.

(b)

1. Assume that a technological change has made it possible to produce twice as much X for any given sacrifice of Y. If both X and Y are superior goods, modify the analysis above to show the effect on the price of X, the amount of X produced, and the amount of Y sacrificed.

2. Returning to the conditions of a above, suppose the various individuals’ endowments occur at differing points along the given productive opportunity locus. Would the optimum production and consumption points be different? Would any trade take place? Explain.

What are the essential characteristics of exchange opportunities and productive opportunities, on the individual and on the social levels?

It has been said that exchange makes possible new types ofproductive opportunities as well, through the institution of the firm. Analyze.

Given an interior endowment explain how the possibility of trade can lead individuals to consumptive benefits (preferred allocations of given social totals over different individuals and productive benefits (larger social totals of desired goods). Make your case using either graphical and/or algebraic analysis.

What are the essential characteristics of exchange opportunities and productive opportunities, on the individual and on the social levels?

Imagine a community of individuals engaging in private production, but where the idea of market exchange had not yet been discovered. Explain analytically the nature of the gains available after the discovery of the possibilities of exchange. Would every member of the community benefit, or might some lose as a result of the discovery?

It has been said that exchange makes possible new types of productive opportunities as well, through the institution of the firm. Analyze.