Question 1

In a two-person economy, Adam and Brandon both produce corn and cars.Adam's marginal cost of producing a car is 50 tons of corn, while Brandon's marginal cost is 70 tons of corn.In this economy, Brandon should produce cars and Adam should produce corn.

Accepted Answer

In this scenario, Adam has a lower marginal cost of producing cars (50 tons of corn) compared to Brandon (70 tons of corn), which means Adam can produce cars more efficiently. Therefore, Adam should specialize in producing cars, and Brandon should specialize in producing corn, assuming their goal is to allocate resources most efficiently.

Question 2

An exchange will take place between two parties as long as:
A)the seller benefits from it.
B)the buyer benefits from it.
C)any one of the parties benefit from it.
D)both the parties benefit from it.

Accepted Answer

For an exchange to take place, both parties involved must benefit from it. If only one party benefits or neither party benefits, then the transaction is unlikely to occur. Therefore, option D is the correct choice.

Question 3

Specializing on the basis of marginal cost of production and trading allows both parties to consume more than their respective production sets would allow.

Accepted Answer

Specializing based on the marginal cost of production allows each party to focus on producing the goods or services they can produce at a lower cost, while trading allows them to acquire the goods or services they cannot produce as efficiently. This results in increased consumption for both parties.

Question 4

Price tags reduce transaction costs in countries where people's time is more valuable.

Accepted Answer

Transaction costs include the time and effort required to search for information, bargain, and enforce agreements. In countries where people's time is more valuable, price tags can reduce the transaction costs by providing transparent and easily accessible information on the cost of goods and services. This reduces the need for bargaining and searching for information, ultimately saving time and reducing transaction costs for consumers.

Question 5

With technological developments, more resources are discovered which change production sets for countries and make world trade more and more beneficial.

Accepted Answer

Technological advancements lead to the discovery of new resources and improve production processes, making international trade more advantageous for countries.

Question 6

If the transaction between you and the seller takes place at a price that equals your valuation of the product, then:
A)you realize all the gains from this transaction.
B)the gains from this transaction are equally divided between the two of you.
C)the entire economic value created by the transaction goes to the seller.
D)the economic value created by this transaction is sub-optimal.

Accepted Answer

The answer of If the transaction between you and the...

Question 7

Standardized goods and services sold in the market are likely to have high switch-over costs.

Accepted Answer

Standardized goods and services typically have low switch-over costs because they are easily replaceable with similar offerings from competitors.

Question 8

Joanne rents out her apartment in Seattle to Alice as she is moving to Dallas for the next three years.Which of the following statements must be true?
A)Alice's valuation of the apartment is higher than Joanne's opportunity cost of renting it.
B)Joanne's valuation of the apartment is higher than Alice's.
C)This transaction creates no economic value for Alice.
D)Alice's valuation of the apartment is lower than Joanne's opportunity cost of renting it.

Accepted Answer

For the transaction to occur, Alice's valuation of the apartment must be higher than Joanne's opportunity cost of renting it out. This means Alice values the opportunity to rent the apartment more than what Joanne would lose by not using it herself or renting it to someone else.

Question 9

In a two-person exchange, if the price offered to the seller is less than the opportunity cost of production, the exchange will not take place.

Accepted Answer

This is because the seller would not be willing to produce and sell the item at a price that is lower than what they could earn by using their resources to produce something else, or by not producing anything at all. As a result, the seller would rather keep their resources and forego the potential income than engage in an exchange that would result in a loss.

Question 10

Transaction costs increase the economic value of an exchange.

Accepted Answer

Transaction costs represent the costs incurred in the process of carrying out an exchange, such as the cost of finding a willing partner, negotiating terms, and completing the transaction. These costs reduce the economic value of an exchange by increasing the overall cost to both parties involved.

Question 11

Natalie can produce 6 shirts in a day, or cook three meals.Her opportunity cost of producing a shirt is 2 meals.

Accepted Answer

The answer of Natalie can produce 6 shirts in a...

Question 12

Suppose a seller's opportunity cost matches a buyer's valuation of the product.Assuming a two-person economy, which of the following statements will be true?
A)The transaction will benefit the buyer, while the seller will neither gain nor lose from it.
B)The economic value created by this exchange will be zero.
C)Both parties will be worse-off after the transaction.
D)The seller will be worse-off than the buyer after the transaction.

Accepted Answer

If the seller's opportunity cost matches the buyer's valuation, then both parties are indifferent towards the exchange. This means that the exchange will not create any additional economic value beyond what already exists. Therefore, option B is the correct answer. Option A is incorrect because the transaction will not benefit the buyer more than the seller, as both parties are equal in their valuation of the good. Option C is incorrect because it assumes that there is a loss associated with the transaction when there is none. Option D is incorrect because it assumes that the seller will be worse off than the buyer, when in reality, both parties are equal in their valuation.

Question 13

The lowest price Jacob will accept from Harold for a bushel of corn produced in his farm is $5.The transaction will go through if:
A)Harold's valuation is less than Jacob's.
B)Harold's valuation is greater than $5.
C)Jacob's opportunity cost is greater than Harold's.
D)Jacob's opportunity cost is equal to Harold's.

Accepted Answer

The transaction will go through if Harold's valuation is greater than $5, as this means he is willing to pay more than Jacob's minimum price. If Harold's valuation is less than Jacob's, they will not reach an agreement. Opportunity costs are not directly relevant to this transaction.

Question 14

The closer the exchange price is to the valuation of the buyer, the greater the buyer's share of the economic value created by the exchange.

Accepted Answer

The answer of The closer the exchange price is to...

Question 15

The higher the transaction cost of an exchange, the lower the probability of the exchange taking place between the buyer and the seller.

Accepted Answer

This statement is true because higher transaction costs increase the cost of trade for both the buyer and the seller, making it less attractive to trade. As a result, the probability of exchange decreases. Conversely, lower transaction costs make it more efficient and attractive for buyers and sellers to trade, increasing the probability of exchange.

Question 16

If a country has absolute advantage in the production of all goods, then it will have no incentive to trade.

Accepted Answer

Even if a country has an absolute advantage in the production of all goods, it can still benefit from trade by specializing in the production of the goods in which it has the greatest advantage and exchanging them for goods produced by other countries at a lower cost. This can lead to increased efficiency, lower prices, and greater consumer surplus.

Question 17

The laws of contracts and their enforceability in court determine the range of transactions
that we will find it worthwhile to undertake.

Accepted Answer

The enforceability of contracts is a crucial factor in determining which transactions will be economically feasible and beneficial to undertake. If contracts are not legally enforceable, individuals and businesses may be hesitant to engage in certain transactions due to the risk of breach of contract and the potential loss of investment. Therefore, the laws of contracts and their enforceability are important in shaping the types and number of transactions that occur in the marketplace.

Question 18

When a hierarchy is in place where one person can give orders which others must follow, the price of the specific task the subordinates are being asked to perform goes undetermined.

Accepted Answer

In a hierarchy, the person in charge determines which tasks need to be performed and by whom. The price of the task may already be determined or negotiated beforehand, or it may be set by the person in charge without input from the subordinates. Therefore, the specific price of the task may not be a consideration for the subordinates when they are completing the task at the direction of their superior.

Question 19

A production point is economically efficient as long as it lies within the production possibilities set.

Accepted Answer

A production point is economically efficient if it lies on the production possibilities frontier (curve), not just within the set. Points within the set are possible but do not utilize all resources efficiently.

Question 20

Tim's opportunity cost of selling his car is $20,000.Rebecca, who is a likely buyer, values that car at $25,000.Calculate the economic value this transaction can create if Rebecca pays $23,500 for Tim's car.
A)$1,500
B)$5,000
C)$3,500
D)$2,000

Accepted Answer

The answer of Tim's opportunity cost of selling his car...

Quiz 2: Transactions and Institutions: the Building Blocks

In a two-person economy, Adam and Brandon both produce corn and cars.Adam's marginal cost of producing a car is 50 tons of corn, while Brandon's marginal cost is 70 tons of corn.In this economy, Brandon should produce cars and Adam should produce corn.

An exchange will take place between two parties as long as:

Specializing on the basis of marginal cost of production and trading allows both parties to consume more than their respective production sets would allow.

Price tags reduce transaction costs in countries where people's time is more valuable.

With technological developments, more resources are discovered which change production sets for countries and make world trade more and more beneficial.

If the transaction between you and the seller takes place at a price that equals your valuation of the product, then:

Standardized goods and services sold in the market are likely to have high switch-over costs.

Joanne rents out her apartment in Seattle to Alice as she is moving to Dallas for the next three years.Which of the following statements must be true?

In a two-person exchange, if the price offered to the seller is less than the opportunity cost of production, the exchange will not take place.

Transaction costs increase the economic value of an exchange.

Natalie can produce 6 shirts in a day, or cook three meals.Her opportunity cost of producing a shirt is 2 meals.

Suppose a seller's opportunity cost matches a buyer's valuation of the product.Assuming a two-person economy, which of the following statements will be true?

The lowest price Jacob will accept from Harold for a bushel of corn produced in his farm is $5.The transaction will go through if:

The closer the exchange price is to the valuation of the buyer, the greater the buyer's share of the economic value created by the exchange.

The higher the transaction cost of an exchange, the lower the probability of the exchange taking place between the buyer and the seller.

If a country has absolute advantage in the production of all goods, then it will have no incentive to trade.

The laws of contracts and their enforceability in court determine the range of transactions that we will find it worthwhile to undertake.

When a hierarchy is in place where one person can give orders which others must follow, the price of the specific task the subordinates are being asked to perform goes undetermined.

A production point is economically efficient as long as it lies within the production possibilities set.

Tim's opportunity cost of selling his car is $20,000.Rebecca, who is a likely buyer, values that car at $25,000.Calculate the economic value this transaction can create if Rebecca pays $23,500 for Tim's car.