Quiz 2: Some Tools of the Economist
No, the statement is not true. The buying and selling of used car between Jones and Smith takes place voluntarily with each other. There has been a mutual gain to both of them and thus, both have been made better off. Though the sale of second hand goods is not included in the national income but the transaction costs between both of them like taxes paid, commission to the middleman(if any) is added to the governments revenue that is used for the welfare of the society as a whole.
The wage rate reflects productivity. The higher the productivity, higher is the wage rate. However, the productivity from a painter's job has not increased much but their wage rates have increased substantially. This is due to the fact that people do not prefer painting their house themselves as they have other jobs to do like household work, service to the employer and so on. Thus, for them it is the value of the next best alternative forgone.i.e. the opportunity cost. Therefore, to be free from painting house themselves, they attract the painters at higher cost due to which their wages have increased substantially.
Suppose there are three persons A, B and C. The opportunity cost of travel time person A is $6 per hour, for B it is $10 per hour and for C is $14 per hour. The travel time from New York City to Washington D.C by air is 1 hr and airfare is $110. The travel time from New York City to Washington D.C by bus is 5 hr and bus fare is $70. Let us calculate the cost of travel by air and by bus for these three people one by one compare their cost of travel. Person A Thus, we notice that for Person A it would be cheaper to travel by bus than by air. Person B Thus, for Person B both the means of travel cost the same. He can select either of them for travel purpose. For person C Thus, it is clearly visible that for Person C it is cheaper to travel by air than by bus.