Quiz 2: Some Tools of the Economist

Business

No, the statement is incorrect because even though trade does not create or make any new material or product, but it creates value for the individuals engaging in trade and makes them better-off. Trade takes place when two individuals mutually agree to trade with each other expecting that the trade will make them better-off. It is because trade channelizes the goods and resources in such a way that it reaches those who value them the most. Moreover, if trade would have not been of mutual gain, trade would not have taken place at all.

Truly wages reflect productivity; however, wages in an industry relative to wages in other industries is also a major contributor to the determination of wages because relative wages form the basis of opportunity cost. If we assume that mobility of labor exists, then a labor will move from low wage industry to high wage industry, other things remaining constant. But whether the labor will move to high wage industry will depend upon his opportunity cost. That is, if the labor is paid a wage which is high enough to attract the labor to new industry then only he will move to other industry otherwise he will not and this high wage should be equal to his opportunity cost or what he was being paid in the previous industry. In the given question even though the productivity of the brush painters has not increased that much but it is the increase in the productivity in other industries that has increased the wages in other industries, and consequently the opportunity cost of brush painters has increased. The increased wages in other industries mean that a brush painter has no incentive to remain in the present industry and will move to other industries. This in turn mean that the supply of services of brush painters will decrease and if they have to be retained in the present industry then they need to be paid a higher wage which compensate their increased opportunity cost. Therefore, the wages of brush painters have risen significantly even though their productivity has increased slightly.

A person with the opportunity cost of travel time of $6 per hour will prefer to travel by bus as it will be cheaper to travel by bus compared to travel by air. It is because with the airfare of $110 and an opportunity cost of $6 per hour, the total cost of travel by air will be img which is costlier than the travel by bus that costs img . A person with the opportunity cost of travel time of $10 per hour will be indifferent to the two modes of travel as both cost the same. It is because with the airfare of $110 and an opportunity cost of $10 per hour, the total cost of travel by air will be img which is equal cost of travel by bus that costs img . A person with the opportunity cost of travel time of $14 per hour will prefer to travel by air as it will be cheaper to do so. It is because with the airfare of $110 and an opportunity cost of $14 per hour, the total cost of travel by air will be img which is cheaper than the cost of travel by bus that costs img .

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