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Econ%2B310%2Bw2010%2BHW1%2BAnswers - Econ 310 Homework...

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Econ 310 Homework Assignment 1 Answer Key Question One 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. In an economy in which all trade occurs through barter, then trade between agent A and agent B is only guaranteed to occur if A wants something that B has and B wants something that A has. This is known as a double coincidence of wants . Consider a situation where A has something that B wants, B has something that C wants and C has something that A wants. Regardless of which pair of individuals meet, there will be no double coincidence of wants. Now, A and B may choose to trade: in this case B gets what she wants. But A would be left holding something that C wants. A may simply not be prepared to make such a trade, as it would impose potentially large transactions costs associated with trying to find an individual like C who will now provide the appropriate double coincidence of wants to motivate trade. As a result, welfare improving trades may never take place. (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.
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Farm Land: This is not easily transported or exchanged (usually exchange requires relatively involved legal proceedings), and is not finely divisible in any useful way (by which I mean that it is finely divisible, but a couple of square feet of land in the middle of a field owned by somebody else is probably not of any real value. So farm land probably serves as a poor medium of exchange. It is extremely durable, so would actually serve well as a store of value. As a unit of account, it probably doesn’ t serve well, since it is not generally true that one acre of land is the same as the next.
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Econ%2B310%2Bw2010%2BHW1%2BAnswers - Econ 310 Homework...

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