A person buys X in one market and combines it with Y purchased in another market. The combination of X and Y gives Z, which the person sells in a third market for a higher price than the sum of the prices of X and Y. Which theory of profit is most consistent with this example?

Question

Quizplus · Accepted Answer

This example describes an arbitrage opportunity, where the person is able to make a profit by buying X and Y in different markets and selling the resulting combination, Z, for a higher price in a third market. According to the theory of profit as the return to being alert to an arbitrage opportunity, profit arises from exploiting price differences across markets due to imperfect information or transaction costs.

A Person Buys X in One Market and Combines It