econ310 hw1 - Eric Slocum ECON 310 Econ 310 Winter 2008...

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Eric Slocum 1/16/08 ECON 310 Econ 310 Winter 2008 Homework Assignment 1 Please submit the completed assignment electronically to the CTools site by 9:00 pm Sunday, January 20 Question 1 Agro is a simple economy. All economic agents own land which they can devote to farming. Farms in Agro produce only three commodities: wheat, cattle and arugula. Farms in Agro are varied in their characteristics, and farmers are varied in their skills. As a result, each farmer is endowed with a different production technology. This means that the relative quantities of wheat, arugula and cattle produced will vary across farms. In addition, farmers are able to devote some of their time to various services: milling wheat into flour, baking bread, tossing salads, butchering cattle and making roast beef and arugula sandwiches. Again, the varied production technologies of the various farmers will imply that any two farmers are likely to choose completely different ways to allocate their time between farming and these other activities. In this economy the following commodities will potentially be traded: farm land, wheat, cattle, arugula, beef, flour, bread, salad and roast-beef-and-arugula sandwiches. (a) Explain what is meant by “double coincidence of wants, and why it poses an impediment to efficient trade in a barter economy. A double coincidence of wants is a scenario where person A has what B person needs and vice versa. A double coincidence of wants is a transaction that takes place when both people coincidentally have what each other want. This poses an impediment to efficient trade in a barter economy in the following example: The cattle farmer needs wheat. The bread baker does not need beef. He needs arugula. Now this trade can work if the person who has arugula needs cattle. So there is now transaction costs seeking out a 3 rd party with farm land who needs cattle. There is no guarantee this will happen therefore trade efficiency is hampered.
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(b) Choose three of the traded commodities and discuss the merits of each as a potential form of “commodity money.” Be sure to address how each would fare filling the three roles of money discussed in class: as a store of value, as a unit of account and as a medium of exchange. Which of the commodities would you anticipate would be embraced as commodity money? Explain why. Cattle, farm land, and bread
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This note was uploaded on 04/03/2008 for the course ECON 310 taught by Professor Hogan during the Winter '08 term at University of Michigan.

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econ310 hw1 - Eric Slocum ECON 310 Econ 310 Winter 2008...

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