The economic value which can be created by a transaction between two people, Ed (seller) and Luis (buyer), is $50 as Ed's opportunity cost of selling is $135 and Luis' valuation of the good is $185.If each gains $25 from this transaction, which of the following conclusions can be drawn?
A)Transaction costs are zero.
B)Luis has higher bargaining power than Ed.
C)Ed has higher bargaining power than Luis.
D)Transaction costs are positive.

Question

Quizplus · Accepted Answer

Transaction costs are zero because both Ed and Luis gain $25 from the transaction, which means that the total surplus created by the transaction is $50. This is equal to the economic value that can be created by the transaction, which means that there are no transaction costs.

The Economic Value Which Can Be Created by a Transaction