Microeconomics · free preview
Terms of Trade and the Distribution of Gains
Any exchange rate between the two producers opportunity costs benefits both sides, and the position of the price inside that band decides who captures the larger share of the gains.
1. The price must sit between the two costs
The price must sit between the two costs
2. Closer to your cost, smaller your share
Closer to your cost, smaller your share
3. What sets the price inside the range
What sets the price inside the range
4. Distribution in the wider world
Distribution in the wider world
5. The acceptable price range
Ana's opportunity cost of a bolt of cloth is 2 bushels of wheat and Ben's is 0.5 bushels. Ben sells cloth to Ana for wheat. Which prices per bolt make both sides better off?
6. Who gains more at a given price
Cloth trades at 1.9 bushels of wheat per bolt, with Ben's opportunity cost at 0.5 and Ana's at 2 bushels per bolt. How are the gains per bolt distributed?
7. The seller's margin per bolt
Cloth trades at 1.1 bushels of wheat per bolt. The seller's opportunity cost is 0.5 bushels per bolt and the buyer's is 2 bushels. Compute the seller's gain in bushels per bolt and write the number.
8. Which price clears the deal
Ben's opportunity cost of a bolt of cloth is 0.5 bushels of wheat and Ana's is 2 bushels, with Ana buying cloth from Ben. At which price per bolt are both strictly better off trading?
9. Who captures the gain
Cloth trades at 1.9 bushels of wheat per bolt, close to buyer Ana's ceiling of 2 and far from seller Ben's cost of 0.5. What does the price say about the split of gains?
10. The buyer's margin
Cloth trades at 1.1 bushels of wheat per bolt, Ana's ceiling is 2 bushels and Ben's cost is 0.5. Compute Ana's gain per bolt purchased in bushels, and write the number.
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