Brett has almond orchards but he is sick of almonds and prefers to eat walnuts instead. The owner
QUESTION
Brett has almond orchards, but he is sick of almonds and prefers to eat walnuts instead. The owner of the walnut orchard next door has offered to swap this years crop with him. Assume he produces 1000 tons of almonds and his neighbor produces 800 tons of walnuts. If the market price of almonds is $100 per ton and the market price of walnuts is $110 per ton: a. Should he make the exchange? b. Does it matter whether he prefers almonds or walnuts? Why or why not?
Value of almond = 1000 * 100 = 10000 Value of walnut = 800 * 110 = 8800 a) He should not make th exchange and it will be better to sell the almond in open market and but walnut from open market as he will save (10000 8800) = 1200 in this process comparing to exchange. b) Yes, its matter. If he
er walnut and other buy options are not there then he may be willing to take up thiscost of exchange and still go for exchange. His preference may have utility more than the cost of exchange involved.
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