1. Four social inventions that support markets are (1) ______, which specify the terms of exchange; (2) ______, which reduce the risk of entrepreneurs; (3) ______, which increases the profitability of inventions; and (4) ______ rules, which provide potential investors with reliable information about the financial performance of firms.
2. Gold farmers earn a wage of roughly ______ ($0.30, $2.00, $10.00) per hour. It will be sensible for a gamer to buy gold coins rather than earning them in the game if the gamers’ ______ is relatively______.
3. One possible source of comparative advantage of the Shaker garden-seed enterprise is that the Shaker farms were roughly______ times______ (larger/smaller) than traditional farms.
4. Arrow up or down: Trade between different POW compounds ______the difference in the price of beef across the compounds.
5. To explain the virtues of markets, Adam Smith used the metaphor of the invisible pancreas. ______ (True/False)
6. Responding to Higher Prices. Consider the gold farm application. Suppose that the elimination of some gold farmers increases the price of gold coins to $0.50. In addition, suppose the typical gamer can acquire 10 gold coins per hour.
a. A gamer will be indifferent between playing for gold coins and buying them if his or her opportunity cost of Wow time is ______.
b. As the price of gold coins increases, the number of gamers buying the coins will ______ (increase, decrease). Explain.
7. Coffee and Cheese Exchange in a POW Camp. Suppose that in the British compound of a POW camp, the price of cheese is 6 cigarettes per cheese ration and the price of coffee beans is 3 cigarettes per coffee ration. In the French compound, the price of coffee beans is 24 cigarettes per ration.
a. Is there an opportunity for beneficial exchange?
b. A British prisoner could exchange his cheese ration for ______cigarettes, then exchange the extra cigarettes for ______coffee rations in the British compound. If he travels to the French compound, he could exchange the extra coffee for______ cigarettes. When he returns to the British compound, he can exchange the extra cigarettes for______ cheese rations. In other words, his net gain from trade is ______cheese rations.
8. Extending Trade outside the Camp. Late in World War II, a German guard exchanged bread and chocolate at the rate of one loaf for one chocolate bar. Inside the Allied POW camp, the price of chocolate was 15 cigarettes per bar, and the price of bread was 40 cigarettes per loaf.
a. Is there an opportunity for beneficial exchange?
b. With the guard, a POW could exchange three chocolate bars for ______loaves of bread. In the camp, the POW could exchange the extra loaves for ______cigarettes, and then exchange the extra cigarettes for ______chocolate bars. In other words, the POWs net gain from trade is chocolate bars.