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Unformatted text preview: used market prices to assess the values of the different commodities involved. What about the firm’s other possible uses for those commodities? For example, consider the jewellery manufacturer with the opportunity to trade
silver for gold. When evaluating the trade, we did not concern ourselves with whether
the jeweller thought that the price was fair or whether the jeweller would actually have
a use for the silver or gold. Suppose, for example, that the jeweller thinks the current
price of silver is too high. Does this matter—would he value the silver at less than
$5000? The answer is no—he can always sell the silver at the current market price and
receive $5000 right now, so he would never place a lower value on the silver. Similarly,
he also will not pay more than $5000 for the silver. Even if he really needs silver or for
some reason thinks the price of silver is too low, he can always buy 200 ounces of silver
for $5000 and so would not pay more than that amount. Thus, indepe...
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- Spring '07