Chapter 8: Gains from Trade

As prices _____, they provide useful business intelligence.

Aggregate information

You have a comparative advantage if you can complete a task:

At a lower opportunity cost than anyone else

The main role of markets is:

Reallocating resources to better use

Internal markets, which are markets that managers set up within their organization, are:

Set up to allocate resources of a company more efficiently, often not using real money

Why would a company set up internal markets?

To solve the knowledge problem

Managers can harness market forces by setting up internal markets, which:

Are organized within a company to buy and sell scarce resources

Which of the following benefits could a company gain from using internal markets?

Better allocation of its resources and more accurate predictions

To get maximum output, you should allocate each task to the person who:

Can do the task with the lowest opportunity cost

You have an absolute advantage in producing a product if you:

Can produce the product using the fewest inputs

Specialization will increase output when it is based on:

Comparative Advantage

If Bishan wants to capitalize on comparative advantage in his life, then he should:

Do more of what he is relatively good at then trade for other things

If you need to make a decision and all the information needed to make a good decision is not available, then you:

Have a knowledge problem

When people focus on their comparative advantage and then trade for other things, they:

Improve their standard of living or increase their leisure time

Use the data in the table to answer the question. The table provides data on how long it takes Maia and Juanita to mow the lawn and weed the flower beds. Who has a comparative advantage in mowing lawns?

Juanita because she has a lower opportunity cost

A prediction market is a market where:

Payoffs are linked to whether an uncertain event occurs