Ch. 8

Trading allows people to reallocate tasks. What are the outcomes of trade?

-People can spend more time on what they are relatively good at, and less time on other things. -People can produce more goods at a lower opportunity cost. -Trading leads to specialization, so people can focus on the task for which they have a comparative advantage.

What are the reasons that prediction markets precisely produce useful forecasts?

-Price is a means of effectively communicating a prediction. -It uses information embedded in the price to communicate a prediction. -Prices are able to aggregate information.

A manager of an advertising company just receives a new project to create a website and produce a video presentation. She must assign these tasks to her team. Alexa can write content in 4 hours and edit a video presentation in 3 hours. Hoshi can perform the content writing in 3 hours and the video presentation in 1 hour. Who should do the content writing and why?

Alexa, because she has a comparative advantage in writing content

Which of these BEST explains what markets do?

Markets reallocate stuff to its best uses, which make people better off.

When a company like Google, which allows its workers to widely distribute information, sets up its own prediction market, what is the outcome?

The internal prediction markets used yield better, more accurate forecasts.

How do Chinese tea farmers learn about a rise in the popularity of tea in the West?

They communicate with buyers through the price.

What is a lesson learned for the management of individual companies from the Korean peninsula?

They should harness the power of market forces.

Do internal markets work the same way as regular markets do?

Yes, both of them efficiently allocate scarce resources to the best uses.

Decision makers need to acquire essential information to make a sensible decision. When the information is not available for them, this creates:

a knowledge problem.

Many buyers use a futures contract to agree to purchase a commodity at a specific time in the future. What is the benefit of looking at the prices of such futures contracts to businesses that produce these commodities?

businesses can obtain useful information about future disruptions to input costs

Specialization allows us to work on specific tasks for which we hold a comparative advantage. When each product is made at the lowest opportunity cost, it:

generates gains from trade.

Markets allow you to trade tasks because each task should be done at the:

lowest possible opportunity cost.

Whether you are responsible for running a household, a company, or the whole economy, your goal in allocating tasks is to allocate each task to the:

lowest-cost producer.

A price reveals the _____ of the sellers, or their cost of producing more goods.

marginal cost

Both North Korea and South Korea were equally poor in the immediate aftermath of the Korean War. Nowadays, the average annual income in market-oriented South Korea is greater than that in the centrally planned North Korea because _____ lead to _____, which make people better off.

market forces; gains from trade

The food bank in Houston knows how beneficial it would be to receive a truckload of fruit. This means that it knows _____ of its food bank.

the marginal benefit

High prices communicate to buyers that:

the marginal cost of producing more is high.

The opportunity cost principle reminds you that the true cost of something is:

what you must give up to get it.

When each food bank knows its marginal benefits, but no one has access to the overall information of every food bank, this causes a problem for managers at headquarters because:

the managers cannot identify the best use for a truckload of food.