Look at Table 19.11. Is there a range of trades for which there will be no gains?

Name: Problem 24, Chapter 19: Principles of Microeconomics for AP® Courses
Uploaded: 2019-08-23T01:40:01-08:00
Duration: 4 min 3 s
Channel: Srikar Katta
Description: Look at Table 19.11. Is there a range of trades for which there will be no gains?

step 1 So in this situation, this is table 19.11. By the way, the situation, um this is the payoff matr

Look at Table 19.11. Is there a range of trades for which...

Key Concepts

Bargaining Range

The bargaining range is the set of possible deal terms (such as prices or quantities) that both parties find acceptable, ensuring that each is at least as well off as they would be without the trade. Within this range, any agreed-upon trade results in a surplus for both parties, whereas trades falling outside it could leave one party worse off or yield no net gain.

Reservation Price

A reservation price is the threshold value at which a party is indifferent between trading and not trading—it represents the minimum (or maximum) acceptable price for a good or service. If trade occurs exactly at a reservation price, the surplus or gains from trade is zero, indicating that there is no net benefit to the transaction.

Gains from Trade

This concept refers to the net benefits that parties obtain when they engage in mutually beneficial transactions. The idea is that by specializing according to comparative advantage and trading with each other, individuals or nations can consume beyond their production possibilities, creating value that neither could achieve alone.

Transcript

00:01 So in this situation, this is table 19.11.

00:04 By the way, the situation, um this is the payoff matrix that we have our sorry not payoff matrix the trade, um, table that we have.

00:12 And, um, first thing we want to do is find the opportunity costs for each country.

00:17 So i'm just going to choose one item, and that's going to be shoes.

00:20 So one shoe in america is equal to four fridges.

00:26 One shoe is equal to four fridges, and in mexico, one shoe is equal to 5/4 of a fridge.

00:37 So in order for there to be a um so we see that mexico has the comparative advantage in this trade because they have the lower opportunity cost.

00:49 So if we wanted a fair trade one in which both countries will gain something, um, they would trade one shoe for something in between 5/4 of a fridge and four fridges.

01:07 Now, if we had something outside of this, that means that the trade would no longer help anybody.

01:13 So if we had one shoe be greater than for fridges, right? if we had one shoe greater than four fridges, america can already do that by itself it can already sacrifice one shoot for greater than four fridges.

01:29 And mexico.

01:31 If we did, um, one shoe for less than five forts fridges, it can already do it for itself.

01:40 So, for example, if we had one shoe for five ford's fridges, that would mean that we have 4000 fridges here.

01:48 Mexico can already produce that.

01:49 That would be an under production.

01:51 Now, if we had this example over here one shoe greater than four fridges.

01:58 Um, what would that? what that would mean is that, um if we have, um, 12 greater than four fridges that would just mean like we produce 4000 here instead...

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