Use the following to answer questions:
Figure: Demand and Supply
-(Figure: Demand and Supply) Refer to the figure. Which statement is TRUE?
A) The gains from trade are maximized at 20 units of output.
B) At 16 units of output, there are unexploited gains from trade.
C) Buyers are willing to pay $20 for the 16th unit of output and it costs sellers $60 to produce that unit.
D) A free market is likely to produce less than 12 units of output.

Question

Use the following to answer questions:
Figure: Demand and Supply 
-(Figure: Demand and Supply) Refer to the figure. Which statement is TRUE?
A) The gains from trade are maximized at 20 units of output. 
B) At 16 units of output, there are unexploited gains from trade. 
C) Buyers are willing to pay $20 for the 16th unit of output and it costs sellers $60 to produce that unit. 
D) A free market is likely to produce less than 12 units of output.

Quizplus · Accepted Answer

At the point where the demand and supply curves intersect, both buyers and sellers are willing and able to exchange 16 units of the good at a price of $40. However, the marginal cost of producing the 16th unit (the cost of producing one additional unit) is $60, which is greater than the willingness to pay of the buyers. Therefore, at this level of output, there are no gains from trade and trade will not occur. This means that there are unexploited gains from trade at all levels of output below 16. Choice A is false because gains from trade are not necessarily maximized at 20 units - this would depend on the specific shape of the demand and supply curves. Choice B is true in the sense that there are unexploited gains from trade at levels below 16. Choice D is false because there is no indication in the diagram that the free market equilibrium would be below 12 units of output.

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